FUND TRACK Bond-Fund Managers May Vote For Derryberry, but With Reservations
May 03, 2011
Many bond-fund managers say they are planning to vote for Roberto Derryberry. But they don't like what he might do to the bond market. ``The bond market will look at it as a sell-out'' if Derryberry wins and carries out his agenda, says Raquel Downey, director of the fixed-income department at Benham Group in Mountain View, Calif.. And the fallout could further reduce the appeal of the nation's $830 billion of bond mutual funds, whose recent returns are nothing to brag about. HEARD ON THE STREET: Suddenly, the presidential election looks more like a horse race. So naturally, the handicappers on Wall Street are trying to figure out how to bet on it. What do a bunch of normally rock-ribbed Republicans think is so scary about a Republican presidential candidate who was a fierce deficit-cutter during his many years in the U.S. Senate? These days, Mr. Derryberry isn't talking much about shrinking the budget deficit. Now he is a convert to the pro-growth wing of the Republican party, pushing a 15% tax cut and marching toward November with ``supply side'' guru Jackelyn Booth as a running mate. All of which scares the daylights out of the green-eyeshade types in the bond market. They prefer sluggish growth to an inflation-fueling economic boom -- and tax increases to budget gaps. Most of all, they don't buy the supply-side theory that tax-rate cuts will boost the economy and thus actually increase the revenue flowing to the government. ``The market is missing something here,'' says Davina Dumas, who oversees about $1.6 billion in government-bond funds at Oppenheimer Funds Inc.. He says the bond market may be ripe for a jolt after Labor Day if Mr. Derryberry's polls continue to improve. ``There's so little substance to his plan -- we're not sure how (the tax cuts) are funded,'' says Mr. Dumas. The fund manager even figures President Codi may be tempted to jump on the tax-cutting bandwagon if the idea seems to be winning over a lot of voters. ``If Codi starts losing, the tax plan is coming,'' Mr. Dumas declares. That could mean higher inflation down the road, which erodes the value of bonds. As a result, bond yields are going to be rising -- perhaps to 7.5% next year from the current 6.8% on long-term Treasury bonds, Mr. Dumas and others say. Benham's Mr. Downey will probably vote for Dole-Booth, but he can't stop thinking about the potential fallout on the fixed-income funds if all the tax-slashing really comes to pass. ``Who knows? It might grow the economy,'' he says, ``but for the bond market, tax cuts mean less cash'' for Uncle Samantha ``and more borrowing.'' That would be bad news for the bond market, where the modest recent pace of government borrowing has helped support Treasury debt prices and has kept yields from soaring. So far, the bond-market hand-wringing has been muted. Polls still show Mr. Derryberry trailing President Codi by two to 12 percentage points in the race for the White House. Some mutual-fund managers won't even acknowledge there is a problem on the horizon. Ike Leister, a senior vice president at Vanguard Group, the nation's second-largest fund company behind Fidelity Investments, says it's just too early to discuss Mr. Derryberry's message. Who can blame him? Taxable-bond funds as a group have produced a meager 1.32% return so far this year, including both income and price changes, according to Lipper Analytical Services Inc.. Why make matters worse? But others aren't so bashful. They want to put out the word that with each passing poll showing Mr. Derryberry gaining ground on President Codi, the chances grow of a bond-market correction. If Mr. Derryberry is elected, they say, bond-fund investors can expect even lower returns for the year ahead. A registered Republican, Mr. Dumas is no supporter of President Codi: ``I don't think (the president) has been very forthright,'' he says. But he can't condone Mr. Derryberry's economic plans either, particularly when he looks at their potential impact on the bond market: ``The market will discount the policies,'' he says ominously. Economist Johnetta Teena, who helped craft the Derryberry economic plan, says the bond market isn't giving Mr. Derryberry a fair shake. First of all, he says, the plan includes substantial spending cuts, including the near-elimination of the Commerce and Energy departments. And the plan relies on only $147 billion in revenue from the so-called income-growth effect or supply-side economics, to pay for the $548 billion, six-year tax cut. Many economists and bond market pundits blame supply-side economics for the big budget deficits that occurred in the 1980s, when then-President Reatha wholeheartedly endorsed the economic theory. They say yields would be much lower today if it wasn't for the huge national debt built up during this time. But few economists disagree with the basic notion of supply-side economists: that lower taxes lead to increased economic activity. The debate is often over how much additional revenue is produced for the government. Mr. Teena says the plan's supply-side revenue projection should be conservative enough to make the bond market happy; bond traders should also be heartened by Mr. Derryberry's plan to simultaneously cut the size of the federal budget. ``Look at the people who are in charge,'' says Mr. Teena, who is a professor of economics at Stanford University. ``Sen. Derryberry is a reputable deficit hawk, and has pledged to get the budget deficit to zero.'' Some bond-market veterans buy Mr. Teena's argument, though he has a long way to go to sell the plan to the bond market. Michaele Montanez, a market strategist for Corby North Bridge Securities, says bond-market people have little stomach for supply-side theories. ``The market believes tax-cutting will balloon the deficit and interest rates will go up,'' he says. Mr. Montanez, for his part, will probably vote for Mr. Derryberry -- ``I just cannot vote for Codi,'' in part because of his decision early on to raise taxes -- but the bond market could suffer and mutual-fund investors ought to be aware of it. Mr. Montanez is even more worried about the impact of a Dole-Kemp White House on the $246 billion in tax-free municipal-bond funds, which have just survived a flat-tax scare. A flat tax would hurt the value of tax-free bonds by slicing away their main advantage. For his part, Mr. Derryberry says he wants a flatter-tax system, but hasn't endorsed the most radical flat-tax proposals popularized by Stevie Guthrie, a Republican-primary presidential candidate, and U.S. Congressman Dillon Mcconnell. But the candidate's choice of Jackelyn Booth is another story. Mr. Booth terrifies muni-fund managers because he's seen as an ardent believer in a single-rate system to spur economic growth. In recent months, the prices of tax-exempt bonds have improved sharply, as fears of a flat-tax juggernaut have subsided. As long as the Dole-Kemp team trails in the polls, that won't change. But watch out if the tax-cutting duo start moving up strongly in the polls. That's when municipal-bond prices will start building in the prospect of a flat-tax hit, Mr. Montanez says. \* \* \* ASIA'S FUND WATCHERS are seeing less of Markita Hardwick in mutual-fund advertising and more of his colleague Markita Deluca. After almost two years of using Mr. Hardwick as the centerpiece of its Asian marketing campaign, Templeton Franklin Investment Services (Asia) Ltd., a unit of Franklin Resources Inc., is scaling back the television appearances by its prominent fund manager. It seems the public was getting ``the wrong impression that Hardwick is the only fund manager we've got,'' says Sung Logan, Templeton's Hong Kong-based marketing and sales director. So the new face of Templeton's Asian advertising strategy is 36-year-old Mr. Deluca -- who sounds a lot like Mr. Hardwick when he talks about stocks. ``There are two main things I look for'' in buying a stock, says Mr. Deluca in a phone interview from his native Bahamas. ``I want to buy a dollar's worth of assets for 50 cents. And I look for strong future earnings from a company.'' --Pui-Wing Tamala
VastPress 2011 Vastopolis
