Our High Yield Fixed income investments can distribute stable income and total return while dampening volatility relative to equities and adding yield relative to core bonds.
Active management and a focus on downside risk can help produce stable long-term out performance. We aim to generate consistent alpha in the top quartile relative to peers which over long periods leads to attractive peer comparisons.
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.
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 yield
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
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.
Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.
Our corporate RI 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.
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