I had a chat with Robert DiMella, a senior managing director of fixed income manager MacKay Shields. DiMella brought MacKay Shields to New York Life in 2009 with $400 million of assets under management. He now manages close to $10 billion there. Retail investors typically buy and hold municipal bonds, but mutual fund managers like DiMella get paid to move from overvalued to undervalued bonds and take advantage of market mispricings. I had a peek into his operation.
Choosing bonds is about the underlying strength of the issuer. DiMella’s group references but does not rely on credit ratings. DiMella thinks that there is too much fear of rate increases and, like Blackrock fund managers, he does not think they are likely.
There may be value in more credit-sensitive parts of the market, like non-investment-grade high-yield bonds. The wide risk premiums seen in high yield are not legitimate, according to DiMella, who thinks they come from fears generated by Detroit and Puerto Rico. Investors are less willing to buy high-yield bonds because they are not comfortable with the risk. “Don’t take duration risk, take credit risk,” said DiMella. Translation: buy lower-quality bonds, but not long-dated bonds.