- Income–Peritus seeks to create a portfolio that generates a high current income, primarily provided by bond and loan coupon obligations.
- Capital Gains Potential–Peritus primarily focuses on the “secondary” market, where we believe there are more opportunities for capital gains via securities priced at discounts to their par or call prices.
- Unconstrained Investing–Peritus views credit as either “AAA” or “D” and places limited value on the rating agencies and their methodologies, which we see as backward looking, reactive, and lag the market perception of risk. Yet it seems that many fixed income investors continue to use ratings as one of their primary investment tools. Additionally, many investment vehicles are subject to other arbitrary restrictions, such as tranche size constraints, that can limit their investment universe. Peritus believe that these arbitrary restrictions can hinder investment performance.
- Disciplined Investment Process–Peritus’ investment ideas, themes and research are generated internally. These ideas don’t rely on Wall Street sell-side propaganda, which we believe drives market participants to invest in the same large, well-covered names and trends. Peritus undertakes a fundamental credit and valuation analysis, paying particular attention to businesses that provide a product or service we view as “essential,” generate free cash flow, have a manageable capital structure, and/or have hard asset values that are not reflected in the bond pricing.
Portfolio Construction and Objectives
Peritus seeks to provide investors with a high tangible income and the potential for capital gains, while also considering portfolio liquidity and volatility. Peritus works to accomplish this via investment in the following, with allocations depending on portfolio size and mandate:
- High Yield Bonds–Peritus does not track an index; rather, we believe we provide alpha to investors through our actively managed, value-based approach. By selecting credits based on a fundamental and forward looking analysis, Peritus works to achieve our goal of high, tangible income generation via the coupon payments, as well as capital appreciation given the discounts available in today’s high yield secondary market.
- Floating Rate Loans–By including floating rate loans, Peritus is able to expand their investment universe and invest where in the company’s capital structure they see the best risk/return prospect. Loans offer income generation, capital gains potential, and, via the floating coupon, lower portfolio duration and can protect against rising rates.
- New/Newly Issued Bonds–While Peritus primarily focuses on the secondary market, we allocate a portion (depending on market conditions) of the portfolio to new and newly issued bonds. We have found that bonds tend to be more liquid in the months following issuance and, because the companies are typically well vetted upon issuance, prices tend to be more stable. With this allocation, we believe we are working to address liquidity concerns and dampen the portfolio’s volatility. The holding period of these securities is usually shorter in nature than other portfolio holdings as we roll proceeds from previous new issues into more recently issued bonds.
Additional portfolio objectives include the following:
- Focused Diversification– Peritus lets the value we see in the market dictate portfolio diversification in order to avoid forcing “de-worsification,” (investing in less attractive names just to increase the total number of holdings or mirror an index). While still broadly diversified across various industries, a typical portfolio consists of 50-100 names—which we believe is an active strategy.
- Short Duration/Maturity Profile– Because we primarily focus on seasoned credits, the stated duration and maturity tends to be shorter than that of the market indexes, while their actual duration is generally even shorter due to early refinancings and take-outs via calls, poison puts, and tenders. Additionally, Peritus invests in floating rate bank loans (depending on the portfolio mandate), which may help reduce their duration even further.
- Performance– Peritus’ goal is to generate superior long-term performance, focusing on absolute returns for clients.