Downturn Upside

We’re still finding out what happens when markets freeze. While individual investors could sell their stocks and bonds and sit on the sidelines (although just about every academic study ever done demonstrates that this is exactly the wrong thing to do), professional investors must be in the market. They have to find value somewhere.

Wan-Chong Kung, of Minneapolis-based First American Funds, is a senior fixed-income portfolio manager and a member of the fixed-income strategy committee, which establishes investment policy for all taxable fixed-income products at the firm. Kung is finding value in a number of places.

Is there any viable investment strategy to pursue in the fixed-income market right now?

Kung: I think so. I hear the caution behind your question. Markets continue to lurch from one crisis to the next. Through all this, what we’ve tried to do at First American Funds is to keep in sight our long-term convictions, recognizing that those convictions may not be fully vindicated in the near term.

We believe that a whole host of assets, such as investment-grade as well as noninvestment-grade corporate bonds and commercial mortgage-backed securities, have more than priced in the deteriorating economic and corporate fundamentals so that they present compelling value. We also believe that while the economy will be sluggish over the next couple of quarters, it should be able to regain a modest upward trajectory toward 2 percent gross domestic product growth.

Are there any other areas of the fixed-income market that offer compelling value?

Kung: Yes. When you look across the spectrum of non-Treasury products, you can make a case that all these products have been beaten up pretty badly. Not just because of investors’ grim outlook on the economy, but also because of the acute lack of balance-sheet capacity and the acute lack of risk-taking appetite.

Is the $700 billion economic stabilization plan necessary?

Kung: You have a lot of distressed assets sitting on the balance sheets of a number of financial institutions—not just in the United States, but globally. They’re taking up a lot of balance sheet space, so there’s not an ability to lend, to take risk and to take advantage of opportunities in the market. I think it would take a very long time for the markets to recover, and to unclog these balance sheets, without some help from the government.