DDJ Capital Management Blog

DDJ’s president, CIO and portfolio manager David Breazzano was recently featured in a Funds Europe article, discussing the firm’s 25^th 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 25^th 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.

Have you considered steering your capital toward companies that are more in line with your environmental, social and governance values?

During the Opal Group’s recent 2021 Public Funds Summit, DDJ Portfolio Manager and Director of Research Roman Rjanikov held a discussion with Erika Kennedy, Director, Business Development, about ESG and High Yield and how investors can have the best of both worlds.

During the discussion with Ms. Kennedy, Mr. Rjanikov elaborates on:

• The potentially huge impact that investors can make via their capital allocation decisions (e.g., by rewarding specific sectors such as sustainable energy);
• Balancing the possibility of attractive returns with ESG responsibilities and goals; and
• Avoiding pitfalls associated with broad ESG mandates and third-party ESG ratings.

Similar to the aggregate high yield bond market (“HYBI”), the lower rated CCC segment has seen meaningful change over the last year.¹ As the table below details, while the relative size of the CCC-rated segment as a percentage of the broader high yield market has changed only minimally, the number of CCC-rated issues in the CCC-rated segment has increased by 15.5% while the option adjusted spread (OAS) has compressed by just over 500 basis points (bps). These changes reflect issues that were downgraded into the CCC-rated Index, as well as those names that exited as a result of default. However, it also reflects a set of CCC-rated bonds that rode out the storm in the lower-tier during the last twelve months.

In our third edition of this blog series on 144A bonds, we explore the difference in rating agency classifications between 144A high yield bonds relative to non-144A high yield bonds.

If you have not yet read the first two installations of this blog series, here are links to get you started:

• Part 1 - 144A Bonds and Why We Buy Them - discussing what these securities are, their increased importance in the high yield market, and why DDJ believes institutional investors seeking exposure to high yield should embrace investing in Rule 144A issuances.
  
  
• Part 2 - The Prevalence of 144A-For-Life Bonds – elaborating on an important trend in the high yield bond market: the prevalence of so-called “144A-for-life” bond issuance (i.e., those issued without registration rights) relative to 144A high yield bonds issued with registration rights.

The exhibit below displays the ratings classifications of the Bloomberg Barclays U.S. High Yield Index – broken out into 144A bonds (which includes both 144A-for-life and 144A with registration rights) and non-144A bonds.

After a wild ride for the high yield market in 2020, what does 2021 have in store?

At DDJ, we are cautiously optimistic. As DDJ’s President, CIO, and Portfolio Manager David Breazzano shares in his 2021 outlook, the high yield market offers attractive relative value and improving fundamentals; however, investors should expect periods of heightened volatility to persist:

"Given the rate environment, low to negative absolute yields across the fixed income spectrum, wide-open capital markets, and reasonable valuations in the high yield market, I am cautiously optimistic about high yield performance in 2021. Credit spreads across ratings tiers declined considerably in the fourth quarter and ended 2020 on the ‘tighter’ side of historical observations. However, the high yield market continues to offer investors attractive relative value compared to other alternatives.