Strategy Description

The core high yield bond portfolio strategy is designed to offer investors with a higher risk appetite the potential for additional interest income and capital gains. This strategy primarily seeks to provide increased risk-adjusted returns by focusing on credits likely to meet scheduled principal and interest payments throughout the holding period. The portfolio is constructed of typically BB and B-rated credits. We look to preserve capital by overweighting better-rated credits going into a recession or market downturn and conversely, overweighting lower-rated credits coming out of a recession or market downturn. We look for capital gains opportunities by investing during times of market price dislocation which varies by credit, sector or times of heightened default risk. Investors in this strategy should be long-term oriented and prepared for more volatility than in high grade bond products.

Highlights:

  • Experienced team
  • Bottom up research driven approach
  • Industry and sector analysis
  • Relative value and credit spread analysis
  • Strong execution capability
  • Disciplined risk management

Strategy Process

Our approach to high yield bond investing employs a highly disciplined credit intensive research effort to construct a well diversified portfolio of expected high return, yet creditworthy, corporate securities. In recognizing that the high yield market has a higher correlation to the equity markets versus interest rate movements, managing credit risk is our top priority. We build our portfolios one company at a time, demanding consistent financial standards and credit metrics. In doing so, we seek to mitigate the inherently higher levels of volatility and credit exposure in the high yield markets. Our research criteria serve as the foundation of our screening process and security selection. We focus on industry default rates, market conditions and capital markets access as important indicators for managing risk.

Eligible Securities:

  • Any U.S. dollar denominated high yield corporate bonds rated BB+ or lower
  • Bank loans, first and second lien bonds, and securities that are 144a’s with registration rights
  • High yield or bank loan-oriented ETFs and closed end funds
  • Preferred stock rated BB+ or lower

Parameters:

  • Median holding B+
  • All holdings rated by at least one of the three recognized ratings services
  • Maximum average maturity 10 years
  • Average duration 4 years
  • No more than 2.5% of portfolio in any one name
  • Risk profile: high within total corporate bond sector

The portfolio construction process involves the implementation of a constrained optimization routine. Our framework enables us to properly manage the risk of the portfolio in a disciplined manner. Our collective experience has taught us that employing a well-structured risk management discipline together with  security selection will lead us to being able to seek deliver desirable long-term investment performance to our clients.

Portfolio construction is conceptually similar across all of our fixed income strategies. We start with a universe of bonds that meet our security selection criteria. Each bond will possess various attributes that enable us to measure its contribution to the portfolio in terms of risk adjusted expected return. The attributes will also be used to measure investment characteristics relative to our benchmark thus establishing risk constraints. The optimization will then establish a portfolio that simultaneously maximizes risk adjusted expected return and meets our risk constraints.

 

The framework allows our portfolio managers and our investment committee to perform risk analysis on candidate bonds or to evaluate different interest rate scenarios. This ability is extraordinarily important in active management. It enables our team to measure the effects of active management decisions on portfolio risk prior to implementation and to subsequently monitor risk in a concise manner.

Successful execution is a critical component of our active management process. While we employ various strategies from credit and yield curve analysis to duration management, and a host of other valuation metrics to help drive returns for our clients, what is not fully understood by many investors is the value-added derived from expert securities execution. We believe that every incremental basis point of return is critical, particularly in the current low interest rate environment. It is important to remember that unlike the equity markets, most bonds are not traded on a consolidated exchange with a best bid and offer system. Bond markets function in an over-the-counter, dealer to dealer marketplace. Inexperienced bond investors are often at a disadvantage by not having access to multiple bid and ask prices at the same time. Simply stated, investors are often unaware of the actual spread and mark-ups they are paying.

Our execution capabilities rely upon decades of extensive professional trading experience. Methodologies we employ in an attempt to enhance returns through better execution:

  • We rely on a relative value approach within and across product sectors.
  • We exhibit patience in an attempt to purchase securities on the bid-side of the market
  • We monitor dealer inventories and product flows in order to assess the impact of supply/demand upon spreads and prices.
  • Experience allows us to identify and take advantage of short-term pricing dislocations
  • We will aggregate as feasible odd lot holdings (bought cheaper) into larger positions, in order to exploit the pricing differential between the odd-lot and round-lot markets.
  • We leverage our years of experience and extensive network of dealer relationships to seek to negotiate better prices for our clients.