DDJ President, Chief Investment Officer and Portfolio Manager David Breazzano recently conducted a video conference with Stacy Havener, Founder and CEO of Havener Capital Partners, discussing how the high yield market has evolved since the pandemic as well as opportunities his team is seeing and other timely topics.
In April 2019, DDJ published a white paper titled ESG in High Yield: Beginning of a Journey, in which we described DDJ’s multi-year journey integrating ESG into our research and portfolio management process. In the final part of that paper, we contemplated where that journey might take us next, anticipating that a likely direction would be the development of a dedicated ESG strategy focused on environmental sustainability.
DDJ President, Chief Investment Officer and Portfolio Manager David Breazzano recently conducted a video conference with Stacy Havener, Founder and CEO of Havener Capital Partners, discussing how the high yield market has evolved since the pandemic, opportunities his team is seeing and other timely topics.
The correlation between high yield and equities is lower than some investors realize. DDJ believes the data in the exhibit below refutes the view amongst some investors that high yield bonds are too similar to equities to warrant a standalone allocation. Over the 30-year time period, the high yield market had a correlation of 0.63 and 0.64 to the S&P 500 and Russell 2000 Indices, respectively. As a result, the data suggest that substituting a portion of equity exposure with high yield bonds can add diversification benefits while potentially improving the overall risk-adjusted return profile of the combined allocations.
DDJ’s president, CIO and portfolio manager David Breazzano was recently featured in a Funds Europe article, discussing the firm’s 25th anniversary, our differentiated high yield approach (specifically the lower-rated credit tiers) and how we've been able to foster robust relationships with a diverse range of clients. One section of the article focuses on how DDJ’s extensive credit investment capabilities have afforded us the flexibility to satisfy our clients’ objectives through the development of customized portfolios. The following text is an excerpt from the full-length article:
“As one might expect, the appetite for CCC-rated debt is very client specific, as are allowances for investments in bank loans. However, over the years, DDJ has remained flexible when employing its brand of bottom-up fundamental research and portfolio construction to successfully achieve its clients’ long-term investment objectives.
Some investors view all CCC-rated debt as essentially the same – high risk with a high likelihood of default. However, DDJ does not believe that all CCCs are created equal. In DDJ’s experience, CCCs generally fall into two categories.
In our fifth edition of this blog series on 144A bonds, we address the common misconception that limited information is available regarding 144A bond issuers and their ongoing operational performance.
For many investors, the ability to consistently generate meaningful cash is the primary reason to maintain a dedicated high yield allocation. In fact, DDJ has observed that over the long term, substantially all of the high yield market’s return has been generated by coupon income rather than price changes.
The exhibit below displays the breakout of total returns of the ICE BofA U.S. High Yield Index over the 30-year period ending March 31, 2021, broken out into the contribution from price return (i.e., bond price appreciation/depreciation) and income return (i.e., coupon payments). One can observe that essentially all of the total return over this time frame has resulted from coupon income, with price depreciation marginally detracting from total returns.
In our fourth edition of this blog series on 144A bonds, we explore the liquidity characteristics of 144A bonds relative to non-144A bonds, the latter of which are more often held in large cap high yield bond mutual funds and ETFs.
If you have not yet read the first three installations of this blog series, here are links to get you started:
- Part 1 - 144A Bonds and Why We Buy Them - discussing the nature of these securites, their increasing importance in the high yield market, and why DDJ believes that institutional investors seeking exposure to high yield should embrace investing in Rule 144A issuances.
DDJ Celebrates 25 Years!
This March marks a significant milestone for DDJ as the firm celebrates its 25th anniversary. In 1996, using the insights that I honed in my previous roles as a portfolio manager at Fidelity Investments and portfolio manager and analyst at T. Rowe Price, I co-founded DDJ. Since the inception of the firm, DDJ has consistently applied the investment process that we originally developed, which is premised upon fundamental analysis of each investment opportunity with an emphasis on exploiting the inefficiencies within the lower tier of the high yield credit market.