Beyond Bulls & Bears

‘Debt’ and ‘Crisis’ Not Inextricably Linked

Eric Takaha
Eric Takaha

With Europe’s sovereign debt crisis continuing to cast its long shadow over markets at home and abroad and political impasse hanging over U.S. deficit reduction efforts, the word “debt” has been subjected to a barrage of negative associations. In this environment, you might be surprised to hear  Eric Takaha, a portfolio manager in Franklin Templeton’s fixed income group,  equating “debt’ with “opportunity”:  

“First of all, I’d say debt, used prudently, can actually be a positive, whether it’s for an economy or a corporation. It allows them to invest in their country or businesses and grow over time. When our investment team thinks about debt, whether it’s for a sovereign country or an individual corporation, we think about how that entity approaches use of debt, if they are doing so in a prudent fashion, or if they are getting overly aggressive.”

The key to identifying what kind of debt holds the best potential lies in meticulous fundamental research.  For Takaha that process begins with a committee of senior analysts who study fixed income markets and identify which sectors they feel represent the best values. From there, individual teams examine portfolio positioning and modify overall exposure to various market sectors:

“We have a very large group of analysts, both on the sovereign side and the corporate side, who have been doing this for many years and we think we are well positioned to uncover those opportunities that, over time, should be moving in the right direction. We’re able to leverage all the different senior folks from each of the sector teams. We talk about the technicals and fundamentals across the fixed income marketplace to determine if a sector is cheap or expensive. Once we have a decision for a sector, we go back to the research analysts and ask each of them to share their best ideas for individual securities and then make our allocation decisions.”

This methodology goes much deeper than analysis of margin and cash flow. Strategic potential is the defining criterion by which each individual security is measured, whether as a high yield or an investment grade opportunity. Both the strategic direction of a company’s overall industry and how a company positions itself for growth bear careful and thorough scrutiny.

Takaha notes that while volatility and chronic negative noise on the macro side will continue as the backdrop for global fixed income investing, in his view, the most effective antidote is a long-term focus on fundamentals:

“Unfortunately, I think the headline noise is going to continue. The good news is that even with all this noise and even with the fairly weak economy that we had in the first half of this year, a lot of the investments that we’re looking at, particularly on the credit side, have chugged along in terms of their fundamentals. What we’re trying to do is separate out some of the market noise from the fundamentals and see how it all plays out over the coming months. We think that by continuing our focus on the fundamentals of individual securities, as long as they continue to be fairly supportive, we’ll continue to find good, long-term investment opportunities.”   

Until next time, here’s a bit of Sir John Templeton wisdom to mull over:

The most costly errors in selecting stocks are made by people whose thinking is dominated by the question of the temporary short-term trend of earnings.”

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