05.01.2012
By Terry Flanagan

ING Looks Abroad for Bond Returns (Part 3)

This is the third of a six-part series profiling ING Investment Management’s bond business.

Matt Toms, head of U.S. public fixed-income investments at ING, expects more emerging-market companies to issue bonds in coming years, diversifying income sources for investors. By way of geography, ING favors countries that have already been through a full monetary-tightening cycle, such as Australia. The strategy “provides bond investors the opportunity to benefit from declining interest rates should global growth remain soft,” Toms said.

ING prefers Latin America over Asia and Europe, as nations such as Brazil and Mexico offer attractive growth prospects and yields, Toms said. No matter where on the globe bonds are found, “it’s important that the client understands the extra volatility that is infused in emerging-market investments,” he said.

Absolute yields of about 7% on U.S. high-yield bonds are lackluster, but the spread of about 500 to 600 basis points above Treasuries makes the asset class a worthy investment, according to Toms.

“The risk premium is still quite substantial on a historical basis, and it could easily compress another 100 basis points before you run into significant headwinds,” Toms said. “In a world of low yields, we think investors ultimately will continue to seek out investments that offer something extra, and the high-yield asset class will be well supported.”

Additionally, ING maintains a direct-lending commercial real estate team. “It’s one of our key strengths and a place where we can generate real insight,” said Christine Hurtsellers, CIO. “We build proprietary commercial real estate loss models that are leveraged to help evaluate Commercial Mortgage-Backed Securities in our public funds.”

The market for the most attractive commercial properties has rebounded, but in Hurtsellers’ view, there are opportunities under the radar. “People have really shied away from what we would call secondary or tertiary markets due to worries about regional banks (and) commercial real estate portfolios,” she said. “Valuations for the given level of risk are really quite compelling for some of these ‘less fancy’ markets, if you will.”

A slowly improving job market should buoy commercial real estate valuations. Even without that expected boost, commercial real estate may fare comparatively well in the event of a negative market event such as a significant corporate bankruptcy or an inflation scare, as “people often will opt to buy hard assets as inflation hedges and because they tend to hold their value.”

ING’s $120 billion in fixed-income assets under management has increased by $10 billion since 2010. The business is in a size sweet spot, according to Toms: assets under management are sufficient to support robust manpower — 100 employees — and infrastructure, yet it’s not of a size that orders will move markets.

“One of the levers we use is asset allocation — adjusting sector allocations to drive value,” Toms said. “Some of our peers are probably too large to do that nimbly…somewhere in that $400 billion to $500 billion range you get to a point where you have to get more macro, because your bottom-up ability to source bonds could become difficult.”

“If you’re too small you may not have a deep enough team to focus on each individual asset class or have robust research teams,” Toms continued. “But if you’re too big, you may not be able to buy a corporate bond because there may be only $250 million in existence and you need to buy $200 million.”

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