Junk Bond King Says Stocks Are Better Than Bonds

by: Wall St. Cheat Sheet

By Elliot Turner

So says Fidelity’s Mark Notkin according to a Bloomberg article. Notkin runs the Fidelity Capital and Income Fund and has made a killing in the high yield world, outperforming all rivals over the past five years. Today he thinks the edge greatly favors equities as opposed to high yield bonds, and Notkin isn’t alone:

“I don’t see the value in the high-yield market,” Notkin said in an interview at his Boston office. “You are not being paid to take risk.”

Corporate junk bonds climbed last year after the U.S. recession ended and the default rate fell. Investors added $55.1 billion to U.S. junk-bond funds in 2009 and this year through September, according to Cambridge, Massachusetts-based research firm EPFR Global. Withdrawals from U.S. equity funds were $129.9 billion in the same period.

It’s time to shift gears because equities offer bigger gains, said Margaret Patel, who oversees about $1 billion for Wells Fargo & Co. in two mutual funds that invest in both asset classes. Notkin’s fund, which can keep as much as 20 percent of assets in stocks, had 17 percent in equities at the end of September, according to Fidelity’s website.

“The pendulum has swung from high yield to equities,” Patel said in a telephone interview from Boston.

Patel said that as earnings rise for companies tied to the global economy over the next 12 months, stocks are likely to deliver more than the 6 percent to 7 percent gains she expects from junk bonds.

When someone as intimately familiar with markets and the relationship between bonds and stocks makes such a strong proclamation it’s time for us smaller investors to take note. This has been a theme of mine in particular on the WSCS lately, talking about the relative advantages of equities to bonds today. There are many catalysts, including the actual underlying fundamentals and perhaps most importantly, the role that the Fed’s policy actions (i.e. QE2) play in shaping future expectations. Go on over to Bloomberg and read the whole article, as it is a highly relevant and very insightful perspective on one of the major questions faced by investors today: stocks or bonds? You know I vote stocks.