Dan Bastasic- IA Clarington Investments Inc.

Bond manager encouraged by U.S. Federal Reserve's stance

Michael Ryval 26 July, 2013 | 6:00PM
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Last spring, Dan Bastasic thought that even though the economic fundamentals were strong, the high-yield corporate bond market had little to offer.

"There were too many people following too few issues in the high-yield space, and that drove yields down to unsustainable levels. I was expecting that as soon as you had an increase in rates, you would get a sell-off," says Bastasic, manager of the $676-million IA Clarington Strategic Corporate Bond and senior vice-president at Toronto-based IA Clarington Investments Inc. As a result, Bastasic raised cash to about 20%.

Bastasic got the sell-off he was expecting when markets went into a tizzy in June after the U.S. Federal Reserve chairman, Ben Bernanke, hinted at the end of quantitative easing.

"This is what we've been waiting for," says Bastasic, a bottom-up investor who watches for macroeconomic signals to time his moves into and out of the market. "It could have been QE3 (the current round of the Fed's bond-buying, known as quantitative easing) going away, or a much stronger equity market driving equity investors out of high-yield bonds. Either way, it was going to be something. So we're putting cash to work," says Bastasic, who has added to existing names.

Bastasic believes that in the next six to nine months, yields on 10-year U.S. bonds should move up to around 3%, compared with 2.5% as of late June. "QE3 has artificially depressed rates by about 65 basis points. If QE3 goes away, rates will drift back to that 3% level. At that level, the market will provide some decent opportunities," says Bastasic, adding that he looks for higher-quality businesses that have little downside risk. The fund's average credit quality is BB- to BB, which is below investment grade but at the higher-quality end of the high-yield market.

One representative name in a fund with about 65 companies is Alliance Grain Traders Inc. AGT, a global producer and distributor of pulse and specialty crops such as chick peas. "Their cash flows are expected to get much stronger over the next couple of years. They have very good asset coverage and the overall demand for legumes has been growing as diets get better," says Bastasic, noting that the 2018-dated bond has a 9.25% yield.

"You can get a quality name yielding over 9%, and yet a lot of the market has been yielding around 7%," says Bastasic, adding that the benchmark BofA Merrill Lynch High Yield Master II Index is yielding about 6.7%. "This yield is higher mainly because it's a smaller issue and not well followed. We're OK with it. But you have to do your homework."

A native of Windsor, Ont., Bastasic is a 20-year veteran of the investment industry who graduated from University of Windsor with a bachelor of commerce and economics degree in late 1993 and initially worked for Union Gas. After spending 18 months on a project concerning natural gas for vehicles, Bastasic was transferred to the finance department, where he was a coordinator of financial studies.

Bastasic spent another year as risk manager, and at the same time completed an MBA at University of Windsor, where he graduated in 1998. In late 1999, in search of another challenge, he joined Mackenzie Investments, where he began as a senior analyst and worked on Mackenzie Sentinel Corporate Bond. By 2003, he was lead manager of the fund.

Dan Bastasic

Bastasic was also on the team that managed Mackenzie Sentinel High Income, a fund that held a blend of corporate bonds and income trusts. In 2003, he was appointed lead manager. That fund was later merged into Mackenzie Sentinel Strategic Income.

In June 2011, Bastasic moved to IA Clarington, mainly because he believed it was a better philosophic fit for his investment style.

Launched in September 2011, IA Clarington Strategic Corporate Bond returned 6.3% for the 12 months ended June 30, versus 6.1% for the median fund in the High Yield Fixed Income category.

Bastasic also manages the $599-million IA Clarington Strategic Income and $540-million IA Clarington Strategic Equity Income. The former fund returned 10.6% for the 12-month period versus 6.8% for the median fund in the Canadian Neutral Balanced category. The latter fund returned 14.3%, versus 10.4% for the median fund in the Canadian Dividend & Income Equity category.

In search of better values, Bastasic has gone to the U.S. market, which accounts for about 25% of the holdings of IA Clarington Strategic Equity Income. This focus is largely attributable to Bastasic's long-term aversion to resource companies. "Our top-down view said that the emerging-market space was going to weaken over time, China was not likely to continue growing at 11% and the world was becoming oversupplied by basic commodities," argues Bastasic. "And valuations were relatively high."

Instead, Bastasic has favored U.S. companies, such as pharmaceuticals giant Pfizer Inc. PFE, and those benefitting from the global consumer rebound, such as Canada's CCL Industries Inc. CCL.B, whose product lines include consumer packaging and labels.

Bastasic lauds CCL for having a global operation, with 20% exposure to non-North American sources, and more than 50% outside Canada. "That's exactly the theme that has the best value."

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Michael Ryval

Michael Ryval  is regular contributor to Morningstar. He is a Toronto-based freelance writer who specializes in business and investing.

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