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We are excited to share this milestone achievement as the Strategy has delivered consistent results over the last five years as a result of our disciplined investment process and value-based approach. The Strategy information ratio of 1.28 since inception reflects continued strong performance relative to benchmark on both an outright and risk-adjusted basis.
We believe the Strategy is well positioned for the long term and is particularly attractive in the current market environment. The long-tenured portfolio management team remains focused on uncovering and delivering value for investors. We sat down with the portfolio managers to discuss what differentiates this Strategy from other high-yield strategies, what has benefited performance and how current positioning may add value.
1. What differentiates PMAM’s High Yield Bond Strategy from other high-yield strategies?
Our top-down and bottom-up approach to portfolio construction and risk management differentiates our Strategy, which we believe allows us greater flexibility to create value compared to following a strict bottom-up approach. Our macro view helps inform our risk posture, which in turn influences sector and security selection decisions. This is in contrast to many long only high yield firms which adhere to a strict bottom-up philosophy.
The three key pillars of our bottom-up credit process center on fundamentals, valuation and technicals. Team structure fosters transparency and decision-making, empowering the team to capture all three elements in their analysis. This is accomplished by combining the credit research and trading functions, which is not prevalent across the industry. Combining these functions not only establishes a more informed credit team, but also fosters employee personal growth and moral.
Lastly, we firmly believe that our collaborative culture supports idea generation and decision-making. Being nimble and opportunistic enables our investment team to move quickly and capitalize on opportunities.
2. What has benefited performance in the short and long term?
Credit process, collaborative decision-making and team structure all contribute to our ability to make tactical changes as market, sector and credit views shift. Being agile has benefited performance during periods of volatility, which we have experienced many times over the last five years. As important inflection points appeared, we have shifted our asset allocation of CCC exposure, floating-rate bank loans, long-duration credit and sector overweights/underweights.
The portfolio management team has extensive investment industry experience across leveraged finance. The portfolio managers work collaboratively, with unique and complementary skills. These attributes have helped to create a culture that values differing opinions, the sharing of information and flexibility of thought.
Our disciplined risk management approach and philosophy of hitting singles and doubles across the portfolio has contributed to our overarching goal of achieving superior risk-adjusted returns. This has led to consistent results over the last five years.
3. What is current positioning and how may this positioning add value?
The Strategy came into the year positioned with a materially shorter duration and spread duration than its benchmark, which continued to contribute to its outperformance as interest rates rose materially in the first half of the year. The Strategy began to reduce its lower-quality CCC risk during the first quarter due to concerns regarding revenue growth and margin pressure. Additionally, risk was reduced in certain sectors that were more likely to be impacted by inflation and persistent supply chain issues, such as autos and retail.
We remain modestly overweight the energy sector with a concentration in natural gas exploration and production companies and high-quality midstream credit as well as overweight healthcare, regional gaming and secured airline paper. We own very little of the recently issued unsecured leveraged buyout bonds. Current positioning should continue to help cushion the portfolio in the current environment, and create capacity to take more risk as opportunities arise.
It is also important to note that the Strategy contains no private placements, internally priced securities or equities. This dynamic, combined with our up-in-quality orientation, creates a relatively liquid and straightforward high-yield portfolio.
*Unless otherwise indicated, all data is reported as of June 30, 2022 and is not a representation of current or future data. Holdings and allocations are subject to change.
1Bloomberg Index
Risk statistics are shown as supplemental information only and complement the full disclosure presentation at the end of this document. Risk statistics are derived using gross returns.
Visit our website here to learn more about the High Yield Bond Strategy.
For more information about the Strategy, contact Chris Fanelli, managing director, business development, at fanelli.chris@pennmutualam.com or (609) 306-7034.
To download this announcement, please see the attachment below.
About PMAM
With over $30 billion in assets under management as of June 30, 2022, Penn Mutual Asset Management is an institutional asset management firm located just outside of Philadelphia, PA that has been offering investment solutions and client-focused services since 1989.
Follow the latest news and insights from the PMAM investment team on our Blog, as well as on LinkedIn and Twitter.
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Disclosures
Past performance is not indicative of future results. Investors should be aware of the additional risks associated with investments in non-diversification, undervalued or overlooked companies and investments in specific industries. In addition, investors should be aware of the additional risks associated with investments in non-investment grade (high yield) debt securities and structured securities, which are subject to greater fluctuations in value and risk of loss of income and principal as a result of interest rate risk and economic risk. Additional risks may include those associated with investing in foreign securities, emerging markets, currencies and derivatives.
Risks associated with derivatives include the risks of the underlying instruments, substantially greater gains and losses than the derivatives’ costs due to the leverage. Short sales are speculative transactions with potentially unlimited losses, and the use of leverage can magnify the effect of losses. Diversification neither assures a profit nor eliminates the risk of loss.
The information herein does not constitute investment advice and the strategy described may not be available to, or suitable for, all investors.
Risk Statistics and Benchmark Definitions
Alpha – A measure of the performance of an investment against a market index or benchmark which is considered to represent the market’s movement as a whole.
Beta – A measure of the volatility, or systematic risk, or a security or a portfolio in comparison to the market as a whole.
Information Ratio – A ratio of portfolio returns above the returns of a benchmark to the volatility of those returns.
Sharpe Ratio – A measure for calculating risk-adjusted return. The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Standard Deviation – A measure of the dispersion of a set of data from its mean. It is calculated as the square root of variance by determining the variation between each data point relative to the mean.
Tracking Error – A measure of volatility of excess returns relative to a benchmark.
Bloomberg U.S. Aggregate Bond Index – An index that is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).
Bloomberg U.S. Corp High Yield – An index that measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on the indices’ EM country definition, are excluded.
Bloomberg U.S. High Yield 2% Issuer Cap Index – An Index that measures the performance of fixed-rate dollar-denominated debt securities with rating Ba/B. The securities instruments are non-investment grade. There is a limit of 2% maximum exposure to any one issuer.
S&P 500 Index – An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.
