High Yield Active Core
Philosophy
Our Team believes that attractive risk-adjusted returns and, ultimately, attractive absolute returns are generated by a strategy of yield capture and error avoidance. Based on the observation that bonds, even high yield bonds, have a limited upside, but a 100% downside potential, this simple observation leads to the most fundamental element of our investment philosophy: the high yield market does not reward inappropriately high levels of risk. When this view is considered in combination with the observation that over any given cycle total return is driven almost entirely by income, our investment goals are to capture the yield offered by the market by investing in stable, quality credits; aggressively protect this yield through a variety of risk control measures; resist the temptation to augment returns by "stretching" for the yield offered by the market's riskiest credits; and manage risk relative to the client's benchmark.
Discipline
Our initial credit screen is the most important filter, as only those bonds that pass this test will be subjected to further in-depth analysis. At this initial screen, bonds are run through a 32-factor progression of both quantitative and qualitative characteristics seeking to identify cross indicators of inappropriate risk: basic financial and liquidity risk; political risk; regulatory risk; litigation or liability risk; technology risk; and other risks found in areas such as capital structure, footnotes to financials, market capitalization or size of issue. Approximately 80% of all bonds are excluded at this stage. We believe that there is no substitute for in-depth analysis or market experience, but the advantage of a highly disciplined initial screen is that these resources can be much more tightly focused on a smaller universe of investment opportunities.
The team adheres to a strict "sell discipline". We will typically sell a bond for one (or more) of the following four reasons: credit deterioration; repositioning caused by a change in our top-down outlook; excessive downward price volatility; or recognition of an alternative superior relative value opportunity.
