Bond Expert Junks Low-End Paper

Steven Vielhaber is no live wire. The understated mutual fund manager considers himself to be fairly ordinary, working 50 to 60 hours a week and spending weekends outdoors with his family. I'm really like most other people, he said. His success with the Pacific Horizon Corporate Bond fund, however, has been anything but run of the mill. Over the five years ended Sept. 30, Mr. Vielhaber has generated annualized returns of 11.06%. That performance has placed the portfolio which is distributed by BA Investment Services Inc., a subsidiary of BankAmerica Corp. No. 1 among all bank-managed corporate BBB-rated bond funds. Mr. Vielhaber, 44, attributes the fund's positive overall performance to a number of factors among them, investing heavily in sectors that provide good yield at a good price and increasing the credit quality of the portfolio. He also cites the combined effort of his two-person support team. There is no doubt, however, that Mr. Vielhaber is the team leader and the one who makes most of the strategic calls for the fund. He has been lead portfolio manager for three years. In keeping with his conservative nature, Mr. Vielhaber avoids making bets on interest rates. He also invests chunks of the portfolio in particular sectors. We believe the markets are efficient, so we try to add incremental value by finding sectors that are relatively cheap, he said. About 60% of the bond fund's $32 million in assets is now invested largely in industrial and financial holdings. Canadian and U.S. commercial paper make up 19.2% of the portfolio, while cash and Treasury holdings account for 6.5%. Though spreads have continued to tighten in many other sectors, financials and industrials have remained a good investment, Mr. Vielhaber said. At some point, he figures, he will have to push the funds in a completely new direction. However, Mr. Vielhaber said he doubts that the business cycle will end soon. While he remains steadfast in his choice of sectors, Mr. Vielhaber has chosen to reduce his exposure to non-investment-grade debt. The fund has gone from investing 7.8% of its holdings in junk bonds at the beginning of last summer to having no junk bonds today. We've gotten defensive against changes in the performance of below- investment-grade bonds, Mr. Vielhaber declared. Lower-grade bonds seem to perform well during the beginning of the business cycle, but they falter as the business cycle progresses, he said. The fund has decreased its Baa exposure from 33.9% to 27.7% and increased its overall exposure in A-rated bonds. However, finding A-rated bonds that are suitable for the fund is a challenge though a necessary one to ensure the fund's overall return, Mr. Vielhaber said. Among the fund's largest investments at the moment are Con Agra, Occidental Petroleum, Telecommuni-cations Inc., and GMAC, each of which makes up 5% or more of total investments. Ms. Moore is a freelance writer in Los Angeles.