Up Close with Bond Portfolio Manager John Queen
What is the outlook for the U.S. and global economies?
We have very moribund global growth, despite every major central bank in the world taking extraordinary measures to do something about it. The U.S. has some pockets of strength that other countries don’t, but they are confined to certain areas rather than stretching across the entire economy. The service sector is OK, and consumers have been the major driver of economic growth. On the other hand, businesses are generally not investing. Some of that is due to cutbacks in energy-related spending because of lower oil prices. But even so, economic growth continues to be powered largely by consumers. That should make for continued modest, but not vibrant, growth in the U.S.
Do you believe the aggressive steps being taken by central banks will succeed in spurring growth?
I question the wisdom of what central banks are doing. They’ve pushed rates down to extraordinarily low levels — and, in fact, to negative levels in Europe and Japan — in the belief that rock-bottom rates and monetary stimulus will equate to better growth. But that really only works well in conjunction with some kind of fiscal or regulatory adjustments, and we’re not getting those. Unfortunately, monetary stimulus alone has not had the intended effect. I suspect that going to negative rates will have a deleterious impact. It just doesn’t make a lot of sense from a practical standpoint.
Are you concerned that investors are taking excessive risks in search of higher yields?
In every market cycle, some investors push into the riskiest assets and come to regret it. Whether it was growth stocks in 1999, real estate in 2006 or possibly long-term bonds now, they inevitably pile into the wrong thing at the wrong time. We strive to avoid those types of risks with our portfolios. We do extensive fundamental research to identify opportunities that we believe can enhance yield without introducing undue volatility. Our focus is on finding securities with excellent or improving credit quality that offer attractive yields for our clients.
What are some of the sectors in which you’re finding compelling values?
In the municipal area, hospitals are an example of an attractive sector, in part because the financial conditions and investment opportunities differ greatly from one medical center to the next. Given the research we do, we think we can separate the wheat from the chaff to find real value.
On the taxable side, we’re finding opportunities in energy companies that our analysts believe have good credit quality and attractive yields but don’t add a lot of volatility. An example is oil pipeline companies. They’re not directly exposed to oil price fluctuations to any notable degree. But because these companies are energy-related, they suffered from the same type of volatility afflicting the rest of the sector. The result was that those bonds became attractively priced — less expensive, with a higher yield — even for well-run companies significantly insulated from energy price fluctuations.
How should clients approach fixed income given the specter of higher interest rates?
Our viewpoint has been pretty consistent: rates are likely to drift up gradually, but we don’t think economic growth here or overseas is so powerful that they will rise dramatically. Bonds continue to play an important role in client portfolios by producing income and functioning as a hedge against equity volatility.
John Queen is a fixed-income Portfolio Manager for Capital Group Private Client Services. He has 23 years of investment experience. John originally joined Capital Group in 1989, before going to Hotchkis and Wiley as managing director of fixed-income. He was subsequently recruited to launch and manage the fixed-income operation at Roxbury Capital Management. He returned to Capital Group in 2009, overseeing taxable and municipal bond portfolios. He is based in our West Los Angeles office.