Fund manager warns leveraged “locust” investors may be back in the bond market

Fund Focus: Thornburg Investment Income Builder

NEW YORK — This stock-and-bond fund’s annual dividend has more than doubled since 2003 under Brian McMahon. He is a co-portfolio manager and chief investment officer of Thornburg Investment Management.

Q: How did you manage through last year’s dividend cuts?

A: Dividends collapsed around the world in 2009, and it was painful. Conveniently in 2009, we had a really good bond market, from the standpoint of being a buyer. People were just throwing bonds overboard after Lehman failed in September ‘08, and that continued well into 2009, and it set us up to be able to make some pretty good bond buys. It’s a bit more fished out in the bond market now.

Q: Should people shift away from bonds into stocks?

A: It depends on who you are and what you have. There are lots of investors who have just bounced back and forth between growth equities and money market funds and never got involved in bonds in the first place. If they’re 67 years old, they need to own some bonds. They always did; it just took them a crisis to figure it out.

Q: So you’re comfortable with the fund’s stock/bond mix now?

A: I’m very comfortable. (As of Jan. 31, bonds made up more than a third of total assets). Just two years ago, they were maybe 15 percent. Before the bond market cracked in the third quarter of 2008, it was a lot of nonsense. There were a lot of people stepping in front of non-leveraged cash investors like ourselves and most retail investors. We were displaced by non-bank banks and leveraged players of every description - CLOs and CDOs. All that stuff is just leverage. So the bad news for bond investors is that some of those people are coming back.

Q: Already?

A: Yeah, already. We thought maybe we had to wait seven years for the locusts to return. They’re already coming back. It probably takes some increase in interest rates to shake some of them off.

Q: Does that make you worry about any bubbles now?

A: Government bond yields are probably not going to stay where they are. If there’s a bubble, it’s in that stuff. I’m not petrified of the bond market. I wouldn’t say just sell anything, but I would say proceed cautiously because yields are low and durations are long.

Q: A year from now, will the stock-and-bond mix be similar?

A: My best bet is that weighting will be skewed more in favor of stocks. As we get money in (the fund), we’ve been putting most of our new money into stocks instead of bonds.

Q: Because yields are low?

A: Yields are lower. Stock prices have rallied for sure, but stock prices of some of the best dividend payers haven’t rallied that considerably.