ridgeworth investments - seix boutique perspective 4q09

8/14/2019 RidgeWorth Investments - Seix Boutique Perspective 4Q09

1/5

BOUTIQUEPERSPE

CTIVE REVIEW OF FOURTH QUARTER 2009

To begin a review of the markets for 2009 you have to start with their absolute retur

Given the state of the economy throughout the year, its remarkable to see the magnitu

of positive returns offered by various sectors of the bond market. Before getting seducby some of the eye-popping returns in 2009, however, its important to look at the pa

two years as a mini-cycle (see Exhibit 1). The 10-year return illustrates just how bad tpast decade was for equity investors.

Its apparent from the returns in 2009 that the Federal Reserve and Treasury we

overwhelmingly successful in reviving financial markets, albeit at a tremendous cost

the U.S. taxpayer. The bottom up nature of the returns, where the lower quality secto

of the market offered the greatest return, seems to indicate that the U.S. experienc

one of the more robust recoveries in the post-war period last year. Not exactly: t

U.S. certainly avoided depression 2.0, but calling last years recovery solid or robu

is a stretch. Assuming the U.S. achieves the median expectation for Q4 GDP of 4%, t

rolling four quarter average will have gone from -1.8% at the end of 2008 to -0.2%

the end of 2009. This disconnect between the fundamental state of the economy (Ma

Street) and asset valuations (Wall Street) following last years robust returns is t

challenge were facing at the start of 2010.

CYCLICAL VS. SECULAR FORCES

Unprecedented fiscal and monetary stimulus have been infused into the glob

economy and although these actions staved off an economic calamity in the short ter

the costs will be borne by future generations in the form of higher taxes, a weaker dol

and a lower standard of living. More immediate consequences of this unprecedent

government stimulus/intervention are the masking of the true underlying condition

the economy and a lack of true price discovery for all types of assets. In addition, ma

of these actions have expanded the moral hazard risk, particularly as it relates to t

Too-Big-To Fail institutions.

ABOUT THE BOUTIQUE:Seix Investment Advisors LLC

Seix Investment Advisors LLC (Seix)

is a fundamental, credit-driven fixed-

income boutique specializing in both

investment grade and high yield bond

management. Seix has employed its

bottom-up, research-oriented approach

to fixed income management for over

15 years. The firms success can be

attributed to a deep and talented group

of veteran investment professionals, a

clearly defined investment approachand a performance-oriented culture

that is focused on delivering superior,

risk-adjusted investment performance

for our clients.

The Author:James F. Keegan

Chief Investment Officer andHead of High Grade Division

Jim is Chief Investment

Officer and leads the

High Grade division of

Seix. Prior to joining thefirm in 2008, Jim was

Head of Investment

Grade Corporate & High

Yield Bond Management for American

Century Investments, Chief Investment

Officer at Westmoreland Capital

Management and Managing Director of

High Grade and High Yield Fixed Income

at UBS Global Asset Management. Jims

High Grade team sub-advises several

of the RidgeWorth Funds, including the

RidgeWorth Investment Grade Bond

Fund which won a Lipper PerformanceAward in 2009. He has appeared on

CNBC and Bloomberg television, and

has been quoted in a range of national

publications. Jim received a B.S. degree

from St. Francis College and an M.B.A.

degree from Fordham University. Jim

has more than 25 years of investment

management experience.

Seix Investment AdvisorsPerspective

Exhibit 12009

Annualized

2-Year Return

Annualize

10-Year Retu

AGGREGATE 5.93% 5.58% 6.33

TREASURY -3.57% 4.73% 6.15

AGENCY 1.95% 5.45% 6.25

MBS 5.89% 7.11% 6.46

ABS 24.72% 4.33% 5.35

CMBS 28.45% 1.04% 6.01

CORPORATE 18.68% 6.22% 6.58

HIGH YIELD 58.21% 8.09% 6.71

Ba/B 45.43% 6.14% 6.17

Ba 46.09% 9.76% 7.63

B 44.73% 3.04% 5.20

Caa 90.65% 3.00% 4.98

Ca-D 136.34% 4.65% 10.84

Loans 53.84% 4.16% n/

S&P 500 26.47% -10.74% -0.95

Source: Barclays Capital, S


2/5

BOUTIQUEPERSPE

CTIVE

Page

The cyclical forces of fiscal spending,

unprecedented expanding deficits, Federal

Reserve policy (both traditional and quantitative

easing alike), coupled with an inventoryrestocking cycle, will likely boost fourth quarter

GDP. Some of this will potentially carry over to

the first half of 2010. However, at some point

the baton will need to be passed from public

sector (support) to private sector (demand).

The secular forces brought on by excessive

debt and the necessary de-leveraging that

follows the bursting of a debt bubble will lead

to less consumption and increased savings as

the consumer balance sheet repair process

progresses. We do not hear many policymakers or economists talking about the excessive debt and unsustainable leverage th

caused this financial crisis. Until the excessive debt is worked off through repayment or default it is difficult to forecast stron

sustainable, organic growth. We are at the early stage of the balance sheet repair that the consumer has recently embarked on, b

based on long-term averages we still have a long way to go (see Exhibit 2).

Final demand from the private sector - consumer spending and business capital investment - will be the key determinants for growin 2010 and beyond. Consumption has barely budged and remains at its post-war peak as a percent of GDP (71.1%) and is likely to fback to its longer term average of 65% of GDP as debt-financed consumption takes a back seat to saving. Moreover, the approachdemographic wave of baby boomer retirements, coupled with inadequate savings, will put additional pressure on consumptiConsumer spending typically leads business capital investment; given current levels of excess global capacity it seems unlikely to expa role reversal with business capital investment being the growth catalyst while the consumer retrenches.

Many of the Federal Reserve programs created during this financial crisis are due to expire in the first four months of 2010. The largone being the mortgage purchase program ($1.25 trillion), which is set to expire at the end of March. It remains to be seen what timpact will be on mortgage rates and the housing market as the Fed ends this form of quantitative/credit easing. Fannie Mae, FredMac and Ginnie Mae accounted for upwards of 90% of the mortgages originated in 2009. The intent of the mortgage purchase progrwas to keep mortgage rates low and home price declines from accelerating. Some obvious questions after the Fed exits are:

What will this do to mortgage rates?

Will Fannie Mae and Freddie Mac step into fill the void as the Fed steps aside nowthat the Treasury has provided unlimitedtaxpayer support (announced on ChristmasEve) for at least the next three years?

Will the mortgage purchase program bereinstituted if mortgage rates rise and homeprices take another leg down?

As we have said repeatedly the key to sustainable

organic growth is jobs. Some leading indicatorsof employment have begun to show signs ofimprovement - initial claims, temp hiring andthe average workweek, which came off its cyclelow. The unemployment rate came in at 10%in December, but this figure is very misleadingsince it would have reached a cycle high of 10.4% except for the fact that 661,000 people dropped out of the labor force that monPeople who drop out of the labor force are referred to by the Bureau of Labor Statistics as discouraged workers and, as such, are ncounted as unemployed or even being in the labor force. Currently the BLS estimates over 6.3 million persons who want a job but ano longer in the labor force. The U.S. needs to generate between 100,000-150,000 jobs a month just to keep the unemployment rate frrising. The labor force in the U.S. shrank in 2009 with a record year-over-year decline in the labor force participation rate, an unusual atroubling sign for labor market conditions. The 2000 - 2009 period will ultimately turn out to be a decade where the U.S. ended with few

jobs than when the decade began. The 10-year payroll growth rate, which was north of 15 million between 1982 and 2006, has beenfreefall since the beginning of 2000 (see Exhibit 3).

SEIX PERSPECTIVE

Exhibit 2: Debt to Disposable Income 3Q09

U.S.

Debt/DisposableIncome

0.3

0.6

0.9

1.2

1.5

Mar 08Mar 04Mar 00Mar 96Mar 92Mar 88Mar 84Mar 80Mar 76Mar 72Mar 68Mar 64Mar 60Mar 56Mar 52

Exhibit 3: Trailing 10-Year Payroll Growth (Dec)

0

5,000

10,000

15,000

20,000

$25,000

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Source: Federal ReseBureau of Economic Analy

Source: B

Debt outstanding in houshold sector, end of period basis;includes mortgage and consumer credit debt. Disposablepersonal income (saar nominal $$)

Q309 1.24average since 1970 0.83average 1970s 0.62average 1980s 0.71average1990s 0.86average 2000s 1.14

Payroll Growth by Decade1960s 17,0651970s 19,4291980s 18,140

1990s 21,7232000s 378


3/5

BOUTIQUEPERSPE

CTIVE

Page

The trailing decade generated 378,000 jobs! Benchmark revisions already advised by the BLS last fall will reduce by over 800,000 tpayroll levels from March 2008 March 2009; hence, the most recent decade of payroll growth will be officially NEGATIVE after thorevisions next month!

While most financial market coverage will continue to obsess over when we see a positive payroll report in the first half of 2010, ireally not where the markets should focus. Small business has been and remains the primary employer in this country, regardless of tmedias S&P 500-centric coverage. BLS data shows that firms with less than 500 employees pay the salary of 83% of the private woforce; firms with less than 50 workers pay the salaries of nearly half of the private work force. The National Federation of IndependeBusiness (NFIB) is the voice of small business as their website proudly proclaims. They provide a host of survey data on a monthly bato gauge the pulse of small business. Sadly, what the NFIB has been telling us of late is less than encouraging. NFIBs optimism indhit a new cyclical low in March 2009 as the stock market was bottoming. With the ensuing bounce in the stock market small busineoptimism rebounded as well; but since May, the level of optimism reflected in the NFIB survey has essentially flat lined, failing to improdespite the stock market rally of 22.6% over the second half of 2009 (see Exhibit 4).

Additionally, this highlights a real dichotomybetween small business and large business,as reflected by the ISM Survey. The ISM Survey,which is a survey of large companies, indicatesthat the economic recovery will be strong, whilethe NFIB indicates a very weak economy andlittle, if any recovery to employment. Smallbusiness not only has to contend with anuncertain economic backdrop, but the potentialfor added costs of Obama Administrationpolicies around national healthcare, taxesand regulation. With small business beingthe engine of job creation in the U.S. it doesnot appear that the employment picture willimprove materially in 2010.

2010 OUTLOOK/MACRO OVERVIEW

As we head into 2010 there are several areas that could be troubling for the global macro picture and markets. Sovereign cre

risks are increasing as the public sector leverages up to bail out the banks and the private sector economy in general. A soveredebt crisis is a possibility in 2010 2011, particularly in some of the peripheral European countries. State and local municipalitin the U.S. have significant budgetary problems and a potential unfunded pension crisis on the horizon. Moreover, victory may habeen declared prematurely in the global banking sector as the credit cycle unfolds and problem loans and charge-offs continueplague the industry.

The Federal Reserve will likely remain on hold through 2010, although short rates could experience some upward pressure as the Feasset purchase program expires and the Fed shifts away from the role of buyer of last resort. Longer term rates will continue todriven by the supply/demand dynamic as the Treasurys gross issuance approaches upwards of $2.5 trillion in 2010 (back in January2001 the U.S. was projected to be debt free and the market debated what the benchmark should be after Treasuries disappeared). expect 10-year interest rates to remain range bound and fluctuate between 3-4%. The combination of retrenchment by the consum(weak final demand), low inflation and the fact that risky assets are pricing in an unrealistically strong economy, ultimately will prov

a bid to U.S. Treasuries that keeps this trading range in place. Stronger data releases early in the year could potentially put upwapressure on rates given the budget deficit and financing needs, although much of this cyclical boost in Q4 is already discounted in tmarket as 10-year rates rose by more than 60 basis points in December. The yield curve is biased to flatten over the course of 20in our view.

While many market participants are of the view that the Great Recession is over there remains a reasonable risk that a double dcould occur if housing takes another leg down. With one in four mortgages having negative equity and remaining equity for maother homeowners historically on the low side, a foreclosure wave is a distinct risk. This is particularly troublesome as the adjustmeprocess begins to hit the middle to higher ends of the housing market at the same time that unsustainable government suppois withdrawn from the system and the underlying employment fundamentals remain challenged. Since the consumer remainscritical to a U.S. economic forecast (again, consumption remains over 71% of GDP with the most powerful multiplier effect) as gothe consumer so goes the U.S. economy. The sources of consumer spending power are income (jobs are the driver), wealth (housis the consumers largest asset) and borrowing (consumer desire is to pay down debt). As such it seems to us that employment ahome prices remain the key drivers of the underlying economy, which leads us to conclude that growth will be subpar in 2010.

SEIX PERSPECTIVE

Exhibit 4: NFIB Optimism Index

80

90

100

110

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Source: National Federation of Independent Busin

December 2009 88.0Up from 81.0 low inMarch but largelyunchanged from May

average since 1986 99.0


4/5

BOUTIQUEPERSPE

CTIVE

Page

While the easy money has been made in risky assets, 2010 will be about idiosyncratic risk and security selection. Corporate cre

remains our choice for the sector with the most favorable risk return profile. Investment grade issuers balance sheets have stro

liquidity and very manageable debt loads, particularly in the industrial sector. A key question that investors must bear in mind is w

shareholders demand that some of the cash sitting on balance sheets be returned in the form of dividends and share buybacks, there

ending this virtuous period where bondholder interests and shareholder interests were aligned. Given the massive spread tightenfrom the very dislocated levels

at the start of 2009 (see Exhibit5), a retracement of some ofthe 2009 move is very possible.

Income oriented investments

(corporate bonds and dividend

paying stocks) will likely be the

beneficiaries of the newfound

saving oriented American. The

equity market will be focused

on top line revenue growth as

the majority of the cost cutting

has already been done.

We are already seeing some

disconcerting signs that

investors memories are short

as deals have been done in the

high yield market indicating

that underwriting standards

are being relaxed as dividend

deals (where bond proceeds are used to pay a dividend to private equity sponsors) and PIK/Toggle (issuers have the option to ma

interest payments in securities rather than cash) structures have been successfully brought to market. Is this the start of a trend

just deals that were done in a euphoric end-of-year frenzy? Either way investors need to be more discriminating in 2010.

Within MBS, where we are underweight going into 2010, performance is going to be about the Fed and their MBS purchase progra

We fully expect the Fed to attempt to cease their activity in the sector at the end of the first quarter; however, it is conceivable th

the Fed may wind up being drawn back in should mortgage rates rise precipitously and threaten any potential housing recove

MBS spreads should remain tight in Q1, though volatility should increase as we approach the March 31st completion of the Fe

purchase program. We expect spreads to widen following the Feds exit, but in all likelihood this will not be a straight line proce

and could be an extremely volatile one as we head into the seasonally more active summer housing market.

Non-agency paper is mostly rated non-investment grade at this point. Much of the paper will likely carry D ratings eventually

actual principal losses hit the sector. The investment grade paper is backed by a strong bid from financial institutions and at curre

price levels is highly leveraged to the housing market. The market seems to be ignoring the building foreclosure pipeline. The Pub

Private Investment Program (PPIP) has definitely assisted in pushing valuations to levels where a somewhat rosy outlook on hous

is a necessity to achieve returns that would make non-agency MBS worthy of consideration.

Despite challenging real estate fundamentals, we see CMBS as the most likely arena within securitized space to provide exce

returns. Strong carry should prove to be a winner within the sub-sector for 2010. That being said, subordinates in general and new

vintages should face challenges with every event that hits the tape. PPIP will be a strong supporter of spreads, especially in t

AM and AJ classes of investment grade securities. We enter the year modestly overweight and continue to selectively add exposusecurity selection will be paramount to performance this year, unlike last years bottom up, risk rally and spread compression th

rewarded any and all CMBS risk.

On the global front, the market is underestimating two potential risks. First, several Euro zone (Greece, Portugal, Spain, Irela

Italy) countries face considerable fiscal and growth risks. The market does not seem to appreciate the depth of the dilemma be

confronted by these countries and there are important similarities to the case of Argentina during the late 1990s. Due to la

fiscal deficits and ballooning public sector debt-to-GDP ratios, these countries are required to make large fiscal adjustments

put themselves back on track to debt sustainability. However, fiscal austerity imposes a major contractionary impulse on econom

activity and these countries are in a monetary straight jacket having no ability to cushion the contraction with offsetting stimul

such as a weaker exchange rate or easier monetary policy. Consequently, there is a high risk that fiscal cuts will lead to slower grow

lower tax collection, and little to no improvement in public finances. This is precisely the cycle which led to Argentinas default a

devaluation in 2001. Argentina did not default and devalue because it lacked the will to tighten its belt. Argentina engaged in

austerity program that was far more aggressive than any being contemplated anywhere in the world today. Argentina defaulted a

SEIX PERSPECTIVE

Exhibit 5: A History of Spreads

0

1

2

3

4

5

6

7

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Source: Barclays Cap

CorporateAggregateGovernment RelatedMBS


5/5

BOUTIQUEPERSPE

CTIVE

RidgeWorth Investments. This perspective was prepared for institutional clients and prospective institutional clients of RidgeWoInvestments. Neither RidgeWorth nor any afliates make any representation or warranties as to the accuracy or merit of this analyfor individual use. Comments and general market related projections are based on information available at the time of writing abelieved to be accurate; are for informational purposes only, are not intended as individual or specic advice, may not represent topinions of the entire rm and may not be relied upon for future investing. Investors are advised to consult with their investmeprofessional about their specic nancial needs and goals before making any investment decisions.

Past performance does not guarantee future results. The performance data quoted represents past performance and currereturns may be lower or higher. The investment return and principal value of an investment will uctuate thus an investoshares, when redeemed, may be worth more or less than their original cost. For performance data current to the most rece

month end, visit our website at www.ridgeworth.com.An investor should consider the funds investment objectives, risks, and charges and expenses carefully before investing sending money. This and other important information about the RidgeWorth Funds can be found in the funds prospectus.obtain a prospectus, please call 1-888-784-3863 or visit www.ridgeworth.com. Please read the prospectus carefully befoinvesting.

RidgeWorth Funds are distributed by RidgeWorth Distributors LLC. RidgeWorth Investments is the trade name for RidgeWorth CapiManagement, Inc., the adviser to the RidgeWorth Funds, and is not afliated with the distributor.

Collective Strength Individual Insight is a federally registered service mark of RidgeWorth Investments.

Page

RCBP-SA-

Not FDIC Insured No Bank Guarantee May Lose Value

SEIX PERSPECTIVE

devalued due to the combination of excessive indebtedness and an inflexible monetary regime. We see serious risks that some

these European countries face similar obstacles.

Second, credit growth rates in China seem unsustainable and fine tuning policy might not be sufficient to ensure a soft landin

While China has enormous resources to delay the problem and deal with a clean up, the negative fallout on Emerging Mark

countries, commodity prices, and global risk appetite would be substantial.

As far as our view on the dollar, we recognize that over the longer run the massive fiscal expansion in the U.S. could lead to concer

about significantly higher interest rates and/or severe currency weakness, however, in the near term the deceleration in growth a

risks in Europe and weakness in Japan are likely to provide support for the dollar versus the euro and the yen.

In summary, global asset markets have transitioned from fear at the beginning of 2009 to an environment where government supp

and intervention have led to complacency and greed. While these powerful forces can continue to take asset prices higher,

believe that fundamentals will ultimately matter again in 2010; strong security selection skills will be the key drivers of investme

success this year.

ridgeworth investments - seix boutique perspective 4q09

Documents