There is a constant debate about the value of active versus passive investing.  And the debate always seems to focus on fees.  Yes, fees for actively managed products are higher, but you can’t just look at a higher fee and say a certain strategy is not worth paying more for.  You need to evaluate the net return expectations.  At the end of the day, it doesn’t matter what you are paying if you are generating more return on your investment after those fees.

Furthermore, you need to consider what you are getting for that active management.  At Peritus, we view our job as an active manager is to manage risk.  Namely, our focus is on avoiding credit problems.  With our intensive credit analysis, we look for companies that have a product or service that is essential or recurring, hard asset values that provide some support for the company’s value, a manageable capital structure, sufficient liquidity, and/or the ability to generate free cash flow.  We are able to avoid credits that may be part of the high yield indexes, but don’t meet our investment criteria for some reason, such as inadequate liquidity, very high leverage, or a huge cash drain causing mounting debt levels.  If you can do the work to be in front of and avoid the problems instead of blindly investing, wouldn’t you do that?

Additionally, active management has a place in evaluating overvalued securities.  Why would you accept a low yield on a credit where you aren’t being adequately compensated for the risk you are taking or tie up money and generate a lower yield than you could be generating in another name with a similar risk profile (the “opportunity cost”)?

At Peritus, we believe that the value we add for investors comes as much from what we do buy as what we don’t buy—we have the flexibility to avoid the questionable credits and the names we feel are overvalued, despite the fact they are part of the high yield indexes.  We put our focus on the risk/return equation, working to maximize our return for a given level of risk, and make sure that we are being compensated for the risk we are taking.