NEW YORK (Reuters) - Max Stone, managing director at hedge fund D.E. Shaw and Co, commenting on the Libor-rigging scandal, said the benchmark interest rate is “not inherently broken” and can be reformed, while independent hedge fund analyst Daniel Yu said he is shorting software giant Microsoft Corp (MSFT.O).
Margaret Patel, managing director at Wells Capital Management, said that equities are a better play than fixed income, but her fixed-income allocation is “virtually all in high-yield” junk bonds.
David Schawel, a fixed-income portfolio manager who writes on Economic Musings www.economicmusings.com/, said mortgage REITs are an "overheated" investment and will gradually return less to investors.
Those were some of the highlights from Day 4 of the Reuters Investment Outlook 2013 Summit. Analysts and money managers shared their best investment plays and takes on topics such as the euro zone debt crisis and the looming “fiscal cliff” of U.S. tax increases and spending cuts.
Max Stone, managing director at D.E. Shaw & Co
Stone said that Libor has nearly recovered its status as a valid benchmark rate after the rate-rigging scandal.
“It’s not inherently broken,” he said. “You can strengthen the laws. But that’s a problem that can and should be solved, and I think is largely solved at this point.”
Daniel Yu, independent hedge fund analyst
Yu said that Microsoft is one of his top “shorts,” a bet that its shares will fall, because competitors such as Apple Inc (AAPL.O) and Samsung have surpassed its innovations in smartphones.
“Microsoft is this big Goliath in a room full of many little Davids who are very busy throwing slingshots at them,” Yu said.
Margaret Patel, managing director at Wells Capital Management
Patel said that nearly all of her bond investments are in high-yield junk bonds.
”I am in my fixed-income allocation virtually all in high yield because I still think junk bonds have the best risk-reward,“ Patel said. ”You get a lot of extra yield, not only over Treasuries but also compared to investment grade. We are in a period where I think defaults will continue to be the low single-digits because there’s liquidity and the economy is good.
“It’s been a year where the risk-taker has been rewarded,” she said. “The fundamentals have just gotten better ... and also with the various quantitative easing programs. Keeping risk-free rates so low ... the risk-taker has been rewarded and I think that will be the case in 2013.”
Teresa Heitsenrether, global head of prime brokerage at J.P. Morgan
Heitsenrether said that various limits are placed on how much leverage an investor can add to a trade as a way of avoiding major risks.
“There are certainly limits where we just wouldn’t do it, and that’s just kind of our risk framework overall, so we extend leverage based on the way that we view the risks of a portfolio.”
Heitsenrether said that “it’s not uncommon” for hedge funds to have as much as 30 to 40 percent of their holdings in cash because of economic uncertainties, but sees high opportunity in credit.
David Schawel, fixed income portfolio manager and writer for the CFA Institute
Schawel said that he is “not a big fan” of mortgage REITs such as Annaly Capital and American Capital and that it is an “overheated” investment. He said that investors expecting consistent high yields could be disappointed.
“There’s a lot of dumb money that are chasing this in hopes of this yield,” Schawel said.
Reporting by Sam Forgione and Katya Wachtel; Editing by Jennifer Ablan and Phil Berlowitz