Salomon Brothers High Yield Bond Fund

www.nytimes.com By CAROLE GOULD

INVESTMENT grade bonds now account for about 12 percent of the $587 million Salomon Brothers High Yield Bond fund — a portfolio that typically owns no such high-rated bonds, says its manager, Peter J. Wilby.

He bought those bonds after the crashes of Enron and WorldCom last year. "Other bond managers were running for the exits," Mr. Wilby said, "and that created big opportunities for us."

The overall credit quality of the portfolio's 200 issuers averages a rating of double-B from Standard & Poor's. (Junk bonds are those rated below triple-B.) The portfolio contains big chunks of triple-B bonds as well as single-B bonds bought in recent months.

The fund's trailing 12-month yield is 9.54 percent, compared with 8.94 percent, on average, for high-yield bonds tracked by Morningstar Inc.

The fund's duration, a measure of interest-rate sensitivity, is 4.5 years, mirroring the Salomon Smith Barney High Yield Market index, he said, "so it has junk bonds' typical sensitivity to interest rates."

But Mr. Wilby said that as interest rates rose, an improving economy would reduce credit risk, "allowing a high-yield fund to do quite well in that environment."

The fund returned 1.7 percent a year, on average, for the three years through February and adjusted for its front-end load, or sales charge, of 4.75 percent. That puts it in the top 16 percent of all high-yield bond funds, which lost 2.3 percent a year, on average, according to Morningstar. The fund returned 3.1 percent in the 12 months through February, adjusted for the load, compared with 0.3 percent for its group.(The fund's current 4.5 percent load is not yet part of Morningstar's database.)

Mr. Wilby, 44, is a managing director of Salomon Brothers Asset Management, the fund's adviser.

The fund can buy corporate or government bonds, typically denominated in dollars, anywhere in the world. Emerging-markets debt, which can account for up to 35 percent of assets, is now about 20 percent, Mr. Wilby said, because he is cautious about overseas risks.

The allocation is based on his 12-month forecast of credit quality.

"Even though the U.S. economy is sluggish," he said, "I see credit quality improving because companies have been punished for carrying too much debt and have spent the last year cleaning up their balance sheets."

Other factors should also contribute to a strong high-yield market, he said. As for corporate accounting scandals, the worst should be over, he said, and a war with Iraq has already been factored into the market.

The fund is about 5 percentage points overweight in the cable and media industries, compared with the Salomon Smith Barney High Yield Market index, Mr. Wilby said, because of his aggressive buying of bonds in these sectors during their meltdown last summer.

Mr. Wilby works with eight sector analysts to pick individual issuers. Over all, he said, he tends to avoid rapid-growth companies with no cash flow. Currently, he owns issues like AT&T and Sprint, as well as other beaten-down bonds. He also looks for above-average expected 12-month returns, based on an issue's price and yield.

He visits companies' executives, too. "We want to see that management is competent," he said, "and not so pro-shareholder that they don't understand their fiduciary duty to creditors as well."

He sells bonds when his industry or credit-quality outlook changes or an issuer's credit quality weakens.

In July, Mr. Wilby bought 9.87 percent subordinated debt due in February 2013 and issued by Cablevision Systems, the cable operator. He paid $67 for each $100 of face value. The bonds now trade at $103.50; they are rated B+ by Standard & Poor's.

Mr. Wilby said the bond's price did not reflect "what we believe to be the true value of the assets." The company generates cash flow, he said, and its core business is solid.

  N August, he bought a 7.25 percent coupon bond due in 2011 and issued by Ford Motor Credit. He paid $92.31 for each $100 in face value of the bonds, which now trade at $93.00. They are rated triple-B by Standard & Poor's.

The biggest bond issuers were under the most selling pressure last spring, Mr. Wilby said, as bond investors reduced their holdings of large-capitalization, investment-grade bonds to diversify their portfolios. " Ford started trading like a cheap high-yield bond," he said, partly because investors exaggerated what they saw as Ford's competitive disadvantage to other automakers.

In July, Mr. Wilby bought 12 percent coupon bonds issued by the Brazilian government and maturing in April 2010. "The government was under a lot of pressure" at the time, he said, as investors feared that the Workers' Party candidate for president, Luiz Inácio Lula da Silva, "would not be market friendly" if elected. But Mr. Wilby said he thought that those fears were exaggerated.

Market confidence has improved, he added, after Mr. da Silva's victory in October. The bonds, for which he paid $63.50 for each $100 in face value, now trade at $76.75.