If you’re in the decidedly unglamorous, but wholly necessary fixed income business, setting up shop in Monument, Colo., serves as an effective (and breathtaking) counterbalance. Scott Colyer is the chief executive officer and chief investment officer of Advisors Asset Management, a firm with $7.3 billion in client assets. The Prudential Securities and PaineWebber alum opened the firm that was to become AAM in 1989, and ramped up significantly on the discretionary, fee-only side of the business in 2003. We asked Colyer about the fixed income business, specifically with the ongoing soap opera that is the municipal space. (Read more from Scott Colyer in the August 2011 feature, "Uncommon Bonds," by Savita Iyer-Ahrestani.)
Is there still a “bond bubble?” Was there ever actually a “bond bubble” to begin with?
If there is or was one, it would have been in the treasury market. That’s the area in which you are not being paid for the risk that you are taking. We call it “reward-less risk.” You’ve got a Fed who’s competing against the open market and is the largest buyer of Treasuries and now the largest owner of Treasuries, even though you know prices overall for Treasuries have been falling precipitously since the Fed began the second round of purchases. You would want to have your lowest allocation to high-grade debt, whether it’s Treasuries or anything else, because in periods of a recovering economy you generally have rising interest rates. It’s a function of greater demand for credit. At some point the Fed begins to slow things down and begins to tighten monetary policy and raise interest rates. We don’t see that this year and probably won’t until next year.
So they’re not going to repeat 1994 and come out of the blue and surprise everybody?
They would lose a lot of credibility if they did that. They might be forced to do it, although the thing that we didn’t have in 1994 was 9% unemployment. In 1994 we had eight hikes in one year. It was brutal; it was ugly. But you’ve already had the municipal market blowout, right? That’s a very fractured market. We find a lot of value there these days in the taxable and the non-taxable side.
Good segue; we were going to ask about the municipal space next.
In our opinion, that’s where the opportunity is. We think that corporate credit is fairly fully priced. We think even less-than-investment-grade is getting fully priced, but the credit [space] tends to do best in recoveries and that’s where our greatest allocation has been. We’ve been able to produce some pretty decent results for our clients.
What do you think of some of the territory paper out there, Puerto Rico or Virgin Islands?
You see a trend towards recovering economies there as well. So not only are we looking at Puerto Rican municipals, but we also look at a couple of the Puerto Rican banks with which we feel very comfortable. They’re really beginning to show a fairly marked turn in their financial performance and, once again, you would expect to have something like that happen in recovery.