Lawrence Jones: Hi! I’m Lawrence Jones, Associate Director of Fund Analysis from Morningstar. And I have the pleasure today of speaking to Robert Arnott who is Founder and Chairman of Research Affiliates and also Manager of PIMCO All Asset and PIMCO All Asset All Authority. Robert, thank you very much for joining us!
Robert Arnott: It’s our privilege, thank you.
Lawrence Jones: Can you give us some sense of where you think the opportunities lay in the market today?
Robert Arnott: Sure, higher bonds are price still almost 20%. You’d have to have 30 or 40% of them go bust in 09. And again in 2010 and again in 2011 and again in 2012 in order for them to deliver only a treasury return. If the defaults aren’t that bad and that’s worst on the default experience under the great depression, if defaults aren’t that bad you’ll likely on a nice premium over treasuries, very interesting area for those who are blessed risk-tolerant. Investment Grade Corporate yield seven to eight percent. They yield five or six percent more than treasuries. And historically, their average annual default rate is something like a quarter percent.
So, another very interesting area, convertibles. Convertibles are bonds and at least through October they were down worst from the stock market. They were covered a little bit since then but not much. So, here you have a segment of the bond market that’s yielding upwards of 20% that has a current major investor, that convertible arbitrage hedge fund community that’s in mass liquidation. And that’s just starting the prices, creates a very interesting opportunity.
And finally, for those invested in stocks, the notion of investing in deep value when deep value was widely out of favor is uncomfortable but the markets don’t reward comfort. The comfortable investments today are the growth stocks that having been hit quite so hard and treasuries. Well, guess what I think will be the hardest hit in 2009 and 2010, growth stocks and treasuries.
Lawrence Jones: That was going to be my next question is where do investors avoid aside from growth stocks and treasuries other, any other areas at the market that you think you know our places that investors should not be allocating their money?
Robert Arnott: You know somebody had asked me a year and half ago if the markets down by half is that going to be enough to make you a ball. My reaction would have been course I’d be wildly bullish. But that’s in a context of the yield environment that prevailed them. We have a very different yield environment today and so if you’re looking at the 3% yield from stocks and 7% or 8% from their self same companies bonds and if their investment grade and 19% of their below investment grade that’s a huge yield spread that the stocks have to make up through growth. I don’t think they can do it, and so I think one of two things has to happen. Those yield spreads have to come back down or stocks have to get a little cheaper. I think those are very decent chance that we haven’t seen the laws in this bear market.
And if we have those bonds are assuredly bargain picking right now. So, I would say stocks in general are not as good to buy as I’d like to think of them after a market crash. I think growth stocks in particular, I think treasuries have issues. I think it’s a little early for REATs for real estate because REATs have to rollover their financing as our report awhile back that said 60% of the REATs out there have no refinancing to worry about in 09. Okay, but that means 40%—that’s bad. So, I view that is an area that it’s a little early. I don’t think this recession is necessarily yet at its halfway mark. We’re right on the cost between early recession and light recession but we’re not there yet. So, it’s a little early to take on some of those risks.
Lawrence Jones: Thank you very much for joining us today.
Robert Arnott: Thank you for your time.
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