High Yield Bonds
The Firm’s approach to high yield bond investing is:
- To capture the upside potential of the high yield market
- To truncate the downside by adhering to strict risk control disciplines
In the high yield market, we believe that the best risk/return characteristics are achieved with an investment approach that employs:
- A focus on a targeted universe of BB, B and strong CCC credits
- In-depth company research
- Security level risk/return analysis
- Optimal security structures
- Strict sell disciplines
We have long-standing processes for investing in high yield sectors that have served our clients over many business and credit cycles.
- Full Market High Yield: Full high yield universe, liquid issues (issuer size > $175 million; $200 million if rated CCC); multiple market makers
- High Quality High Yield: BBs and B-rated credits only; liquid issues (issuer size > $175 million); multiple market makers
Company Specific Research
Factors examined in all companies:
- Asset protection
- Cash flow/Deleveraging
- Management team
- Liquidity sources
- Competitive position
Proprietary industry models:
- Analysts assess company strength within context of industry expertise
Relative Value Screen
Proprietary industry models:
- Receive real-time data feeds from multiple sources
- Input from analysts’ financial projections
- Portfolio decisions based on credit vs. price
- Positive industry fundamentals
- Industry pricing power
- Benign regulatory environment
- Favorable demographic trends
High Quality High Yield: Industry Concentration:
- 2x industries that are 4% or greater in index
- 3x industries that are less than 4% in index
Full Market High Yield: Industry Concentration:
- Maximum 25% in any one industry
- Security structure
- Cash flow structure
- Position in capital structure
- Senior or subordinated
- Secured or unsecured
- Fixed or floating
- Recommendations are debated in group discussions
- Portfolio managers make final decision across industries
- Traders review technicals and implement strategy as soon as practicable
Monitoring & Oversight
Seven analysts track detailed terms of indentures and credit agreements
Past performance is not indicative of future results.
Investment Risk Management
Prudent risk management is paramount to our High Yield Bond process. We employ a strict portfolio construction methodology, sell discipline, and trading strategy to mitigate risk.
We actively manage our High Yield Bond Strategies, tailoring to clients' objectives.
Allocation decisions are a collaborative effort between our Senior Portfolio Managers and Analysts. By focusing on healthy credits, we aim to reduce the inherent default risk associated with High Yield investments.
Security selection is the most important component of our management style. We believe that extensive and meticulous credit and structure research is the key to successful security selection. Since we make no attempt to time the market or forecast interest rates, we devote all our resources to identifying value opportunities.
Our Senior Portfolio Managers construct each client portfolio from the bottom-up, bond-by-bond; we do not compromise our strict underwriting standards to achieve an artificial yield level.
We employ a strict sell discipline for our High Yield Bond Strategies with the objective of generating superior risk-adjusted returns over a market cycle.
Our high yield sell discipline has two components:
Upside Spread Target:
- Analyst establishes upside spread target for all portfolio holdings at time of purchase
- Team monitors spread targets continuously, to reflect fundamentals and market conditions
- Team sells bonds when spread targets achieved
Downside Tolerance Limit:
- Price decline of 10%, relative to peers, triggers automatic formal credit review
- Buy / Hold / Sell recommendation established as result of credit review
- Position is sold if the sponsoring analyst determines that the issuer’s fundamentals have changed
- We believe the first sale is often the best sale
Below are descriptions of our High Yield Bond Strategies.
Full Market High Yield
A more opportunistic approach to High Yield Bond investing, this portfolio allows for more concentrated positions and up to 30% investments in CCC-rated securities.
High Quality High Yield
This portfolio invests in the healthiest segment of the high yield market, liquid BB- and B-rated bonds.
Global High Yield
This portfolio is managed like the Full Market High Yield mandate plus a non-dollar component.
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