Dispersion in the High Yield Market

We saw heightened volatility return to the high yield market in early November, but after a couple weeks it largely dissipated and the market quickly rebounded.  We have seen a few similar bouts so far this year, with the marketing being hit by selling pressure and large outflows for a couple weeks and the media coming out questioning if the high yield market was poised for a big decline, only for it to be very short-lived and buyers return to the market to take advantage of the discounted merchandise.

With that said, we have finally begun to see dispersion in the high yield market.  We are seeing high yield investors reacting to company specific news, taking a bond price down on weak earnings, disappointing news, or industry challenges.  New issues aren’t just being waived in and prices in the secondary market aren’t all increasing irrespective of credit prospects.

Investors are beginning to show some selectivity, which we see not only as healthy but also as providing us a sweet spot as credit pickers.  We believe that the concept that it doesn’t pay to think and just buying the one of everything that has been embraced by passive investors is starting to lose ground.  This has been a popular strategy over the past few years and it has worked as both stocks and high yield bonds have increased.  But changes are happening and we are getting further along in the cycle, so we believe it is all the more important to pay attention to what you own via an active portfolio.

We believe it pays to think and there will be ways to make (and to lose) money.   There are credits that may be misunderstood or don’t meet the minimum tranche size threshold of the larger passive funds, that we see as undervalued and may present an attractive yield and potential capital gains opportunity, and there are credits that we see as expensive or have fundamental issues that should be avoided.  We don’t see any structural issues within the high yield market (default rates are expected to remain tame and the outlook for Corporate America is stable to improving) and investors need yield within their portfolio; thus we see an actively managed high yield allocation as a viable way for investors to generate that yield.

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