Global High Yield
At a Glance
- Primary Benchmark: Bloomberg Global Unhedged High Yield Index or other high yield benchmark, as specified by client direction
- Portfolio construction combines the Global Fixed Income team macroeconomic and currency strategy with the quantitative and fundamental sector and security selection analysis of the High Yield team
- Yield, option-adjusted spread, and expected total return adjusted for default probability are our primary measures of value
- Investments typically are concentrated in sectors and individual issuers that we believe offer the best total return potential
- Portfolios normally consist of 50 to 100 corporate domestic and foreign issuers with position sizes limited to 5% at purchase, excluding issues of the U.S. Government
Objectives
We strive to provide an attractive total return by seeking to generate a high level of global income and modest capital gains, while attempting to protect against inflation. Our goal is to outperform the benchmark by 1% (net of fees), on an average annual basis, over a complete economic cycle of several years.
Universe
Global high yield corporate debt issuers generally rated below BBB- or Baa3 by at least one rating agency. On occasion, the fund will invest in unrated securities deemed to be of comparable quality. We may also invest, to limited degrees and dependent on client guidelines, in investment-grade corporate bonds, emerging market debt, preferred stock, and convertible securities.
Investment Process Summary
We apply our top down global fixed income process when structuring global high yield portfolios. This macroeconomic and currency perspective is combined and incorporated with our fundamental analysis when constructing global high yield portfolios. The cheapness of individual sectors and issuers is determined using these quantitative and qualitative credit tools. The subsequent portfolio will generally consist of 50 to 100 global high yield corporate bonds that we believe to be undervalued by the credit markets.
Research Process Focused on Fundamental Credit Analysis
Our company analysis focuses on the fundamental economic drivers of the business and assesses whether there is adequate financial strength and flexibility to meet ongoing commitments. Avoiding deteriorating situations is critical to delivering consistent results. We evaluate not only the business prospects of the issuer but also whether the current price is attractive relative to risk. In analyzing the underlying risk/return relationship, we look at the individual bond characteristics such as coupon, tenor, covenants, call schedule, bond rating, and size, which all factor into the price we are willing to pay. We take a position in a security when we have sufficient downside protection and it is priced attractively. We seek to invest in businesses with improving return on invested capital, stable or improving competitive advantages, manageable balance sheets, and outstanding managers and employees.
We also evaluate management’s treatment of bondholders and stockholders. We believe management teams that understand the competitive dynamics of their business and employ prudent capital allocation often produce value for bondholders and stockholders.
Security Selection on Strong Theses
After the credit research is complete, the portfolio managers determine whether a security is attractive relative to asset and interest coverage and relative to other securities with comparable risk. We will only own the bonds of a company that we can analyze and value.
Sell Discipline
We follow a disciplined approach to sell decisions, with issues sold for two primary reasons—valuation and fundamental deterioration. An issue is typically sold as it approaches our yield target and/or another more compelling investment opportunity arises. Alternatively, an issue may also be sold when the initial thesis supporting the investment is no longer valid, and we believe significant downside is likely.