Ellington's Vranos: Invest in people, not companies

NEW YORK (Reuters) - Michael Vranos, chief executive officer of $6 billion fixed income investor Ellington Management Group, says it is much better to invest in loans taken out by individuals than by companies.

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“We have strong evidence to believe that the balance sheet of a consumer ... is much stronger than the balance sheet of a corporation,” Vranos said at the Reuters Global Investment Outlook Summit in New York on Tuesday.

The average U.S. homeowner is “on pretty strong footing” because of low debt, equity in the value of his or her property, and relatively strong employment rates, he said. That means, according to Vranos, that homeowners will pay off their debts, therefore benefiting securities tied to mortgages, credit cards and other consumer loans.

In contrast, Vranos said corporations expanded their debt in recent years, and the yield on such bonds is in the mid-single-digit percentage range, for a high-risk, low-reward investment.

“This just doesn’t make a lot of sense right now,” Vranos said.

Vranos said his Old Greenwich, Connecticut-based firm continued to short such high-yield corporate debt, also known as “junk” bonds.

An additional reason to be negative on junk bonds, Vranos said, is because of the capital that has flowed into related exchange traded funds and the potential problems around the liquidity they promise investors. He said a glitch in the markets could cause problems for investors who believed their money could be pulled instantly.

The hedge fund manager said that he saw positive investment opportunities in Europe, including loans to small businesses and residential mortgages loans. Vranos said Ellington, for example, had bought non-performing loans in Spain and properties in Portugal.

Ellington, which Vranos founded in 1994, has produced average annual returns of about 13 percent in its now $1 billion flagship credit fund, which is roughly flat so far this year, according to a person familiar with the situation.

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Reporting by Lawrence Delevingne; Editing by Lisa Von Ahn, Bernard Orr