UPDATE 1-LBO bonds risky, Old Mutual Dwight’s Meigs warns

* LBO bonds look frothy to Old Mutual Dwight’s Meigs

* Fund avoided crashing deal bonds in 2008

* Lipper award for record as market dropped, then jumped

(Adds name of fund’s sub-adviser)

BOSTON, March 24 (Reuters) – The key to running a
high-yield debt fund is discipline and a sixth sense to avoid
risk, according to Edward Meigs, co-manager of the Old Mutual
Dwight High Yield Fund (ODHYX.O: Quote, Profile, Research).

Right now is a time to be wary of deal-related bonds, Meigs

“The pendulum has swung in favor of issuers,” he said.
“It’s a time when you’ve got to be extremely careful in reading
the covenants and keeping your credit discipline in the face of
market euphoria.”

That means favoring the more steady and defensive issues,
Meigs said. He expects the high-yield market overall will still
outperform a weakening Treasuries for the rest of the year even
as problems build up in the deal sector.

The $11 million Old Mutual Dwight fund was the Lipper award
winner in the high yield bond category. The award recognizes
consistent performance over three years adjusted for the amount
of risk the fund took.

The fund gained an average of 16.03 percent annually for
the three years ended Dec. 31, 2010, better than the category
average of 7.11 percent a year, according to Lipper.

Meigs and co-manager Sean Slein, who are based in Baltimore
at the fund’s sub-adviser, Dwight Asset Management, try to
focus on the somewhat predictable cycles that the high-yield
market passes through. A strengthening economy encourages high
yield issuers and investors to take more and more risk on
credit quality and eventually ends in a bust.

“The key driver of performance is the way we moderate the
risk of the portfolio depending on where we are in the credit
cycle,” Meigs said.

That led the pair to tamp down their risk level starting in
2006. By the time the credit crisis hit in 2008, the fund was
concentrated in shorter maturities with lots of steady
industrial and energy sector issuers. Lowest rated CCC bonds
and debt that came from leveraged buyouts were scarce.

“We felt a lot of those deals were done at unsustainable
debt levels,” Meigs said.

In 2009, it was time to go bargain hunting, which bolstered
performance in 2010 and 2011.

Issuers in the leisure sector were crushed on fears that
consumers would stop spending for vacations. Meigs was able to
buy bonds issued by the Royal Caribbean cruise line due in just
a few years for 70 cents on the dollar, for example.

The bonds traded up into the 90s and Meigs has reinvested
in longer-term debt from the same issuer.

(Reporting by Aaron Pressman; Editing by Walden Siew)

UPDATE 1-LBO bonds risky, Old Mutual Dwight’s Meigs warns