High Yield

Philosophy

Our High Yield approach is first and foremost about risk control because any individual high yield bond priced near par has more absolute downside risk than upside potential. In virtually every phase of our investment process, we attempt to control risk and limit defaults. This strategy focuses on credits that generate increasing cash flow, contain strong asset coverage and whose management is committed to paying down debt.

Discipline

In virtually every phase of our investment process, we attempt to control risk and limit defaults. Our strategy focuses on credits that generate increasing cash flow, contain strong asset coverage and have managements committed to paying down debt. We emphasize acceptable margins of safety, a high concentration of top tier quality companies, market share leaders, industries with high barriers to entry, and timeliness of purchases with proprietary screens.

Our universe is defined as those issues that yield more than 250 basis points over the comparable Treasury bond and are larger than $75 million in issue size. The portfolio management team also emphasizes companies that have the ability to quickly pay down their debt. Quantitatively, we search for companies that are generating a significant amount of free cash flow. We also focus on current asset replacement value as an additional level of protection. In addition to passing financial tests, company management teams must intend to pay down debt with free cash flow or equity issuance. Finally, the investment team searches for catalysts that will drive capital appreciation.

Our sell discipline is equally important to our investment process. Knowing when to sell is critical in management. The upside of a bond is limited as the price appreciates and it becomes call constrained. Our sell discipline is based on our valuation of the investment, a change in fundamentals, and portfolio diversification.