Shocks represent the rule in high-yield market, not the exception, says Fridson

By Paul A. Harris

St. Louis, Jan. 2 - If investors plot 2004 high-yield strategy on the theory that they will earn their coupon, along with a small price change from 2003, they do so against a rather daunting set of numbers, according to Martin Fridson.

The noted strategist, who is also the editor-publisher of the weekly high-yield strategy newsletter Leverage World, told Prospect News on Friday that a slight change in the year ahead, relative to 2003, is mathematically improbable.

"There have only been two years, 1988 and 1996, when bondholders earned the coupon plus or minus a price change of less than two points," Fridson said.

"Shocks are the rule rather than the exception," he added. "You have a lot of very high returns and very low returns, and basically nothing in the middle.

"The least probable outcome is that you will earn the coupon."

Fridson went on to say that the junk bond market presently appears to be overpriced.

"Our conclusion is that the high-yield sector, as a whole, is rich," he said, adding that the same may be true of every other asset class as well.

"Presumably the managers that will do better are the ones who buy bonds that are of better-than-relative value - even if everything is rich - or if they guess right with regard to what is going to happen with interest rates, whether spreads are going to widen dramatically.

"I'm assuming that 2004 won't be as dramatic as 2003, when you only had to make one decision: whether or not you were going to overweight triple-Cs, or overweight bonds priced at less than 80 cents on the dollar."

Fridson also expressed the opinion that buying better relative value should put a fund manager in the upper ranks in terms of total return relative to the peer group.

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