Light at the end of the interest rate tunnel?

The bond market is in for more volatility, but a turnaround could start to emerge in the next six months, according to the head of Invesco Ltd.'s worldwide fixed-income division. Karen Dunn Kelley, who recently completed her first year of running the Atlanta-based firm's worldwide fixed-income division, said that she sees some positive signs in the market. "What we are seeing is people raising capital and adding to liquidity," she said. In her more than 25 years in the investment industry, Ms. Kelley said she has never seen similar market conditions. "I don't think we are at the end yet," she said. "By the third and fourth quarter, markets will start to settle and improve," Ms. Kelley said. "There will continue to be fallout from the U.S. credit crisis."
The decline in oil prices should help boost the value of the dollar, Ms. Kelley said, but stronger spending and growth numbers would be indicators of an upswing. Still, the down markets are creating opportunities. Wider spreads mean higher yields. Making the right call in the next six months will be critical, Ms. Kelley said. "It's a dynamic and complex fixed-income market at the moment, which is creating tremendous opportunities for investors," she said. "We are seeing historically wide spreads on corporate [bonds], asset-backed [securities], mortgage-backed bonds and bank loans," Ms. Kelley said. "A tremendous opportunity is being presented, and getting this call correct will be critical." Invesco hopes that its global expertise will strengthen its decisions. A little more than a year ago, Invesco began a reorganization and merged two business units, creating the worldwide fixed-income division and naming Ms. Kelley to lead it. As of midyear, she oversaw $158.3 billion of Invesco's $461.3 billion in total assets. "We have expertise across the entire spectrum of the globe," Ms. Kelley said. "Wherever the best independent decision is being made, we use that across the system." Of course, there were immediate challenges for the new division. For one thing, Invesco had lost a 16-member team of fixed-income managers to Deutsche Asset Management, a division of Deutsche Bank AG of Frankfurt, Germany. That was the catalyst for moving forward on the reorganization quicker than it might otherwise have happened, Ms. Kelley said. "We added managers to replace the ones who left," she said. "We hired from outside the firm and created bench strength from inside the firm as well." Today, the division has 125 in-vestment professionals, more than half of whom are researchers. Along with the defections, the firm experienced about $16.2 billion in redemptions from its stable-value funds last year. This too has stabilized, Ms. Kelley said. Year-to-date as of June 30, stable value had $3 billion in net outflows. "Nobody wants [a defection] to happen," Ms. Kelley said. "When you think about the way we manage money and look at the business, our customers were not, from a product or performance perspective, hurt all that much," Ms. Kelley said. "We have cross-coverage for everything," she said. "There were people in place, including a breadth and depth of people involved in the stable-value business, who could step up." Also, within the past few months, the U.S. credit markets have begun to unravel. But the firm has avoided some big problems by not having any subprime-mortgage exposure in its money market funds. Other Invesco units — which include Atlanta-based Atlantic Trust Private Wealth Management, In-vesco PowerShares of Wheat-on, Ill., and New York-based WL Ross & Co. LLC — also have un-dergone change. This year, Aim Investments, the Houston-based mutual fund company, was re-branded. The firm was involved in the mutual fund market-timing scandals of 2003 and paid $375 million in 2004 to settle claims. Since 2005, the firm has changed management and product offerings. Firmwide, Invesco experienced $14.6 billion in net outflows in the first half of this year, with assets coming largely from equity funds. But product offerings are more balanced today, the firm said. "At the Invesco Ltd. level, yes, our strategy is to continue to look for ways to deliver our investment expertise in ways that meet our client needs — regardless of the geography and regardless of the channel," Ms. Kelley said. The goal of her division, of course, is to grow. "We think we have the basic building blocks and tools to compete with anyone in the fixed-income operation," Ms. Kelley said. E-mail Sue Asci at sasci@investmentnews.com.