Gray Lady dealing in junk bonds Clients with millions longing for higher yields

Mutual funds

November 22, 1998|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

News item: Northern Trust is going to sell junk-bond funds.

Has the world gone mad?

Northern, the venerable Gray Lady of LaSalle Street and bulwark for the rich and the conservative, has lured star manager Jane McCart from Chicago neighbor Stein Roe and Farnham to head a high-yield municipal bond mutual fund set to open in December.

Stephen Timbers, hired by Northern in February from the former Zurich Kemper Investments (now Scudder Kemper Investments) to develop a family of publicly listed mutual funds, also has several candidates to manage a separate corporate junk-bond fund.

Why Northern is chasing yield is no mystery: Its well-heeled customers are demanding higher income.

With yields on credit-risk-free Treasury bonds dropping to 5 percent from 7 percent since last year, a $2 million investment loses $40,000 on annual income, Timbers noted.

"That may not be important to a lot of our clients, but it's important to some of them," he said.

Besides, he reasons, with the recent turmoil in stocks, what's wrong with being a bondholder who stands higher in the pecking order of claims against companies whose stocks Northern may already own?

Stodgy image aside, Northern's foray into mutual funds is designed in part to exploit a marketing base unique in Midwestern banking: Although it administers $1.1 trillion in trust assets, the bank manages only $220 billion of that total.

As the eighth-largest fund custodian in the world, Northern performs safekeeping and administrative services for billions of dollars in pension funds as well as corporate and individual accounts that could be generating investment management fees for the bank but aren't.

Watching all that money gives Northern a look at what institutional and individual investors are doing, Timbers said.

"If we don't have the investment products around, they're going to buy them from someone else," he said. Northern's asset management for years has focused on growth stocks, but "an awful lot of our customers have appetites for different investment styles," he said.

Then why not flog commodity funds, hedge funds and other high-priced investment dalliances for the rich?

That's going too far, Timbers said. Registered mutual funds have the convenience, daily reporting and performance orientation that most investors -- including Northern's customers -- want, he said. Offering alternatives to growth stocks, investment-grade bonds and money-market funds does not require the bank to stray far from the conservative base that defines its image, he added.

In awarding McCart its highly prized five-star rating for risk-adjusted returns, Chicago-based mutual fund research firm Morningstar applauded her cautious, value-oriented approach to the highly specialized world of high-yield municipal securities.

"McCart's caution may have kept the fund from leading the high-yield pack lately, but over time she has delivered very good returns without taking on a load of credit risk," Morningstar analyst Justin Craib-Cox wrote in September.

The biggest challenge in building a mutual fund and investment strategy for individual Northern accounts will be finding tax-exempt securities with less than investment-grade ratings that provide sufficient diversification and credit safety, McCart said.

Typically, a high-yield municipal bond fund will not buy general-obligation bonds of state or local governments -- many of which carry insurance that brings a triple-A credit rating. Rather, she looks at so-called project financings, which are private-sector developments financed through tax-exempt bonds.

Long-term care facilities, electricity co-generation plants and multifamily housing projects are among the deals picked over by high-yield muni investors. The research is similar to selecting stocks, McCart said, but "the muni high-yield market does not have that kind of supply."

Considering Northern's traditional customer base, "there's a place for high-yield in someone's portfolio," she said.

Timbers added, "A client may not want to use it, but I'm sure they'll be happy we told them about it."

Pub Date: 11/22/98

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