Financial Adventurer Starts `Junk' Fund

MARKETWATCH

GEORGE R. Mateyo is an adventurer. Just consider: At a time when the two little words junk bonds have suddenly taken on connotations of opprobrium on Wall Street, Mr. Mateyo has helped start a brand new mutual fund that just happens to invest in these high-yield, high-risk bonds. Mateyo is president and chief executive officer of Carnegie Capital Management Company, based in Cleveland. Carnegie has some 17 mutual funds. But two of those funds are new, the Carnegie Cappiello Diversified High Income Fund, a junk bond fund, and the Carnegie Cappiello Emerging Growth Fund. The emerging growth fund is a small capitalization fund that invests in companies with assets of about $100 million or less. Both funds were started up on Nov. 30 of last year.

The junk bond fund, which was under consideration for 18 months before it officially began, now has $5 million in assets. It joins about 80 other high-yield bond funds in the US. The small ``cap'' fund has around $9 million. Both have struggled against the slowdown in the economy, with the junk bond fund down about 2 percent since its inception, the small cap fund down around 3 percent.

Now, growth funds are hardly uncommon creatures in the investment field. But why start a junk bond fund now? Prices have plummeted since last fall, with many bonds now trading at 60 percent to 80 percent of face value, compared to about 100 percent last summer. Moreover, the Drexel Burnham Lambert Group, which sought Chapter 11 bankruptcy protection last week, was the symbol of the great junk bond euphoria of the 1980s.

Mateyo laughs. Despite all the negative discussion in the media, it is prudent, he argues, to hold onto existing junk bonds and to consider buying new junk. He expects a rebound for junk bonds during the period ahead. Moreover, he says, given the relatively good performance of the overall US economy, this is a good time to start up a new mutual fund.

Carnegie Capital is in good company, it seems, when it comes to starting new mutual funds. According to the Investment Company Institute in Washington, some 250 to 300 new mutual funds began during 1989 alone. But that's net growth, since some existing funds moved from one investing category to another, were merged with other funds, or just disappeared altogether.

Some new funds are quite innovative. Case in point: the Kemper Retirement Fund. It provides investors a ``guarantee'' that their original investment will be protected until maturity (around 10 years). But at the same time, by reinvesting dividends from US government zero coupon bonds, shareholders can gain long-term capital growth. Since its inception on Feb. 5, the fund has already snapped up $2.6 million in assets, says Steve Radis, a spokesman for Kemper. Kemper has about 30 fund products.

One factor constantly driving the introduction of new funds is the need to ``provide a full family of funds,'' says Mateyo. Investors, he says, ``like to be able to have the flexibility to move their assets back and forth'' between funds and different types of investment.

Mateyo believes the press has sown confusion about junk bonds. Of the 23,000 corporate bonds rated by Moody's and Standard & Poor's, only about 800 are ``investment grade,'' that is, highly unlikely to default. The rest are in some way ``junk.''

What's important about structuring a junk bond fund, says Mateyo, is providing room for long-term gain, while also ensuring relative safety.

Thus, Carnegie Cappiello's junk fund has 57 percent of its assets in cash (short-term Treasury issues); 18 percent in stocks; and only 25 percent in what Mateyo calls ``carefully diversified junk.''

Although his new fund is down 2 percent, some other junk funds have fared worse. The Pru-Bache High Yield Fund is down over 9 percent from last summer through this past week; Kemper High Yield Fund is down about 10 percent; Putnam High Yield Trust a little over 11 percent. The numbers suggest caution in buying junk.

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