Dynamic's Domenic Bellissimo on Corporate Bonds

Domenic Bellissimo discusses his views on corporate bonds in 2011.

Dierdre McMurty interviews Domenic Bellissimo, of Dynamic Funds on the subject of investing in corporate bonds. Bellissimo shares his view on current areas of opportunity, as well as areas that they are avoiding, and provides insight dispelling the BBB Public Private bond issuances.

Domenic Bellissimo was previously worked at a big bank on the Risk Management side, and he also worked at a big government pension fund on the credit analysis side.

DM: What did you learn in those previous positions that you can apply now?

Domenic Bellissimo: I spent a lot of time analyzing companies in the credit market learning how to structure transactions. What works, and what doesn't. Basically, best practices. So a lot of that has been formulated and made its way into our current credit investment process.

DM: What's your process? How do you go about setting up to invest in a corporate bond?

Domenic Bellissimo: We focus on three main things:

First we'll screen the environment:
1) where do you want to be?;
2) where's the best place to be investing?
3) where do you not want to be investing?

Then we'll analyze each company, management teams, we'll analyze the securities;

Lastly, we'll monitor each investment on an ongoing basis to make sure its still a safe and sound investment.

DM: in a webcast back in December, you expressed some concerns about the current environment for corporate bonds; can you build out on that a little bit?

Domenic Bellissimo: Yes, actually, what we're seeing over the past year is an increase in what we consider to be red flags. So one thing is risk premiums, which are compressing especially for the weaker issues (securities). Companies that historically were not able to issue in the public markets are now doing so, and these deals are oversubscribed. Covenants are starting to weaken, and lastly there is an increase in shareholder friendly activity, such as share buybacks.

DM: Just to follow up on your last point. You referred to "shareholder-friendly" activities, as something negative though ... Why is that?

Domenic Bellissimo: Shareholder-friendly activities have the potential to undermine the value of credit-worthiness of any bond, so you have to be able to assess every management action in order to determine whether or not it has a negative impact on your investment.

DM: And Which industry sectors do you currently find the most attractive?

Domenic Bellissimo: We're currently focusing on those sectors which have good cash flow generating abilities, so TELCOs and Cable for example. Sectors like the energy sector, which have a strong long term view on the underlying commodity, that being oil. And, also, best in class real estate companies.

DM: And what about the sectors where you're really uncomfortable and you're staying away?

Domenic Bellissimo: Well, first of all we're underweight in financials across all of our mandates, and that's predicated on the European situation and the concerns there, and [as well] a significant underweight in long dated financials [issues].

DM: And looking at the North American market, where are you finding the best valuations right now, in the corporate field?

Domenic Bellissimo: It ebbs and flows between Canada and the U.S., but right now I'd say that the U.S. is showing very good valuations especially on the recent back up in yields.

DM: What are the other areas, Domenic, you identified in that December webcast as a point of concern, were the bonds that were issued around public/private sector partnerships. Can you tell us a little bit more about your anxiety there?

Domenic Bellissimo: The public/private sector issuances, or triple B (BBB), as they're commonly referred to, is something that historically has been the domain of insurance companies and pension funds. They're issued in order to help finance infrastructure projects, such as hospitals. We look at them and we are concerned, and we've stayed away from them for three main reasons: 1) there's a significant amount of construction risk, that frankly is hard to quantify, 2) many people look at these and view them as quasi-government issuances and frankly they're not, and 3) they're very illiquid securities.

DM: Thank you for that.