High Yield Fixed Income

Our Strategy strives to maximize risk adjusted returns, and seeks superior absolute returns over a market cycle, with lower volatility than the broad market. Our approach involves maximizing the default adjusted yield and spread of a diversified portfolio, implementing a fundamental, value-driven investment style.

First, and foremost, our approach is about risk control. Default risk is the dominant risk factor, and all portfolio investments meet stringent, and quantifiable minimum “margin of safety” requirements.

Secondarily, we strive never to buy credit risk at the wrong price. An optimal, risk adjusted, portfolio construction combines dynamic fundamental, bottom-up selection, with continuous top-down portfolio risk management.

Margin of safety

Default risk is the dominant risk factor, and all portfolio investments must meet stringent, and quantifiable minimum “margin of safety” requirements.

Investment process

Furthermore, the investment process strives never to buy credit risk at the wrong price utilizing a default-adjusted yield and spread methodology and aims to maximise the default-adjusted yield and spread of a diversified portfolio. We have a strong credit research team that utilizes our process to allocate issuers that pass our stringent quality control one of our proprietary Risk Groups, which are used to identify attractive investment opportunities.

Contrarian risk positioning

Our tactical risk positioning relative to the broad high yield market is typically contrarian; often considerably divergent to peers and largely indifferent to a benchmark index.

Investment process summary

Minimum yield screen: with "positive event potential" exceptions
Minimum margin-of safety requirements; quantified and stringently applied
Qualitative fundamental corporate assessments to further safeguard against default risk
Default adjusted methodology, focused on the spread premium necessary to overcompensate to estimated default risk

Catalysts for total return, expected to result in total returns above a coupon based yiel
Portfolio construction, combines bottom-up credit selection with top-down portfolio risk management
Credit risk control: managed by the dynamic, continuous implementation of the disciplined bottom-up investment process (as described above). Primary credit risks include: default, Negative Event and ESG risks.
Risk monitoring and review: includes daily portfolio reporting and analysis

Case study

August 2020

Renewed Growth in High Yield Market

• The US High Yield Fixed Income market has recently increased in size, after 6 years of modest decline, in sharp contrast to the very rapid growth of Leveraged Loans and Private Debt markets

• There has been a record new issuance year-to-date (August 2020) of relatively high quality bonds, with many secured bond deals

• Much of the additional High Yield market growth due to significant “fallen angels” (downgraded IG bonds)

• All of these trends have led to a 25-year low in HY credits rated B- or lower

Source: BofA Merrill Lynch Global Research, BofA Merrill Lynch Bond Indices, S&P LCD, as of July 31, 2020.
Past performance is not indicative of future performance.

Our corporate responsible investment strategy is based upon three strategic pillars of quality, stewardship and engagement.

We partner with our clients to provide solutions that maximise the probability that they will achieve their investment objectives. We assess our client needs based on three key criteria: risk tolerance, investment horizon and return ambition level. We utilise third party monitoring services for our direct holdings.

Learn more about the High Yield Fixed Income team's approach to responsible investment

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