Frankfurt He is one of the few financial experts who has been successful with money for about half a century: George Muzinich. Investors who focus on interest rates are the first to know them, because in the field the founder of the American asset manager Muzinich & Co knows his way around.
In an interview, the expert explains how he wants to generate income for his customers despite low interest rates. And he has a clear idea of how high those returns could be: four to six percent a year.
Mr Muzinich, interest and bond yields are falling ever deeper. Where is the end?
Nobody knows. In many countries, states would have to intervene to support the economy. The central banks can not handle this even with an ultra-loose monetary policy. There are already many trillions of dollars in bonds with negative returns. That can not go on forever.
Where does the negative trend end?
There is a critical point where people could lose confidence in the central banks.
And what are the investors doing now? Should they still buy interest rates – without a return, but with the hope for price gains?
In the past, government bonds were considered risk-free investments. That's history. Government papers are in my opinion today a dangerous investment. With them you will most likely make losses.
Some analysts consider even lower market rates possible, even in the US, even negative returns as in Europe. Then the government bonds would drop there further price gains.
Only in a deep recession would that be possible. With such a forecast, I remember the well-known US economist Ezra Solomon. He once said: The only function of economic forecasts is to make astrology look respectable.
What do you think about the idea of not buying bonds because of regular income, but because of possible price gains?
In retrospect, interest income provided the bulk of returns, with price gains at most sometimes top. I remember: I bought US government bonds for my mother in the early 1980s. At that time there were 16 percent interest for the ten-year, today under two percent.
Are there any bonds that are worth your while and worth buying?
It is possible to get real euro income over the next few years in the interest rate range. I am thinking of credit portfolios and well-rated corporate bonds, such as BBB-rated US bonds in telecommunications, cable and satellite, food and beverage. The offer currently between four and six percent return. This is quite attractive in today's bond world with increasing fluctuations in value.
And higher-yielding high-yielding stocks?
In this so-called high-yield segment, we see opportunities in subordinated financials whose issuers have an investment grade rating of "A" or better. We stay down to earth and want to avoid the risks. Take, for example, the bond of a poorly rated energy company. Of course, the bond offers a higher return. But if energy prices continue to fall, the company may go bankrupt and the bond is a failure. But if I count on rising energy prices, the bond would be a relatively bad deal, because I would be better off with the company's stock.
What is the benefit of reduced interest rates for your own business as an asset manager?
We believe that we can still provide our customers with the above-mentioned returns, and without any long-term risks. We focus on shorter terms. That means little price risk if interest rates should rise.
Does that solve all the problems?
No. If an insurance company has to invest money for its contributors, that's a drama in today's interest rate environment. It is a big burden on the later payees and thus the whole society.
We are experiencing a veritable rush of high yield bonds with investment grade status. This is proven by the dramatic drops in spreads. How do you assess the situation?
In our view, companies with good credit ratings have built large mountains of debt. With the immense interest rates, they were able to borrow in enormous proportions. With the funds they have increased the dividends and repurchased shares. We have observed this with companies in the USA and in Europe.
How do you identify the increased risks?
Ten or more years ago there were many more companies with good rating "A" or "AA". Many have fallen back to "BBB". That's just a good rating. But as an investor, I have to look at these companies much more closely than before, because they are not that stable anymore.
How much did the interest rates on such issues drop today?
Very deep. For companies with "BBB" ratings, there is up to one percentage point more in government bond yields and around 4.5 for US high yield bonds. In Japan, we had a 10-year corporate issuance, "BB" rating and less than one percent return. That's crazy.
What is the biggest risk in the financial markets?
Trade conflicts are among the big issues on the anxiety list. But I believe in a solution. Of course, short-term shocks are conceivable. Closing the Strait of Hormuz could bring the price of oil quickly to $ 130 a barrel. The big topic, however, remains the low interest rates. They act like drugs. It's very hard to get away from it.
Could we experience a long period of low growth, and thus a Japaneseization of the bond markets?
Unlikely. Japan has many special features and it is internally funded. I would rather think of stagflation in two or three years.
How long will you still be boss of your company?
I personally manage no more money. I even got my Bloomberg terminal removed so I would not be tempted. We will remain a private company, not going public.
Is that an advantage?
We can think long term rather than short term. As a listed company, however, you only have the next quarterly figures in mind.
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