Joseph Balestrino, manager of the Federated Total Return Bond Fund, expects his $30 million bet on General Motors Corp. bonds to help his fund overcome a slow start in 2005 and beat his performance benchmarks.
"Any news can add $10 to those things in a heartbeat," said Balestrino in an interview from his Pittsburgh office, referring to GM bonds.
GM bonds repayable in 2033 lost about 25 percent of their value in the two months before Standard & Poor's lowered the company's credit rating to junk on May 5. Balestrino said he's banking on an increase in the bonds after the Detroit carmaker unveiled plans on June 7 to slash annual costs by $2.5 billion. Since the announcement, GM bonds are up 10 percent.
The cost cutting shows that "senior management takes this with utmost seriousness," said Balestrino, 50, who joined Federated Investors Inc. 18 years ago and has managed the Total Return fund since it opened in 1996.
Federated's fund is up 1 percent this year, trailing the 2.9 percent return of the Citigroup Treasury Index and beating the 0.4 percent advance of the S&P 500-stock index, including reinvested dividends. During the past five years, the fund rose at an annual rate of 7.2 percent, matching the gain of the Citigroup Treasury Index and outperforming the 2.4 percent slide of the S&P 500.
About 3 percent of the $1.4 billion fund's assets are in bonds of GM and Ford Motor Co. In all, junk bonds account for less than 10 percent of the fund's holdings. About 37 percent was allocated to corporate bonds, 29 percent to mortgage-backed securities and 21 percent to Treasury and other U.S. government bonds as of April 30.
GM's $3 billion of 8.375 percent bonds due in 2033 is currently worth 84.5 cents on the dollar, down 20 percent from $1.05 as recently as Feb. 14. The bonds have rallied from a low of 71.5 cents since May 17, buoyed by GM's cost-cutting plan.
Bondholders may have lost as much as $32 billion this year on debt sold by GM and Ford, according to estimates last month by analysts from Deutsche Bank AG. GM owes bondholders about $105 billion.
"I'm bearish on GM," said Brett Hoselton, an auto analyst at KeyBanc Capital Markets in Cleveland, who has a "hold" rating on GM's stock. "They'll continue to lose market share."
GM is shedding more than 25,000 U.S. manufacturing jobs and closing an unspecified number of assembly plants after the company reported a first-quarter loss of $1.1 billion, the biggest in its 97-year history.
Balestrino and fund co-managers Mark Durbiano, 45, Donald Ellenberger, 46, and Christopher Smith, 50, may get indirect help from billionaire Kirk Kerkorian, who said Tuesday that he had almost doubled his stake in GM to 7.2 percent of the company's outstanding stock since early May.
Kerkorian's presence prompted speculation that chief executive G. Richard Wagoner Jr. would step up efforts to return the company to profit after the first-quarter loss and a 6.7 percent drop in U.S. auto sales this year.
