In a number of recent blogs, we discussed ESG implementation and whether it is possible to construct a dedicated high yield ESG portfolio that meets the ESG objectives of its investors. Ultimately, DDJ strongly believes that an investment manager can implement a high yield ESG strategy that pursues a dual mandate: provide high yield investors with strong risk-adjusted returns while also contributing a positive ESG impact.
The following is an excerpt from our President, Chief Investment Officer and Portfolio Manager David Breazzano’s semiannual CIO Perspective. You may access the full document via the link provided below.
In two recent blogs, we discussed ESG implementation and whether is it possible to construct a dedicated high yield ESG portfolio that meets the ESG objectives of its investors. From DDJ’s perspective, we absolutely believe that ESG-focused high yield investors can drive change that is consistent with their ESG objectives, primarily through capital allocation decisions that affect the cost of capital for issuers across the high yield market.
Last week, we posed the following question: Does the current spread of the high yield market adequately compensate investors for the risks they’re taking? In this blog, we further discuss the potential for defaults over the medium-term, which is a key factor in answering the aforementioned question.
At the most basic level, the main reason corporate bonds, and high yield bonds in particular, pay a higher coupon than U.S. Treasuries is to compensate investors for default risk, or the potential loss of principal if the high yield issuer is unable to meet its debt obligations when they come due. Therefore, in determining whether the current spread of the high yield market adequately compensates investors for the risks associated with investing in such a market, the outlook for defaults over the medium term is the single most important factor needed to make such determination.
Expectations that high yield issuer fundamentals will continue to improve as the economic recovery gains momentum are driving lower default expectations over the intermediate term. High yield issuer fundamentals, after a very difficult calendar year 2020, are already improving at an impressive pace. Much of the poor operating performance by companies was generated during the first half of 2020, shortly following the onset of the pandemic, with results then beginning to show modest quarter-over-quarter improvements during the third and fourth quarters of 2020. The pace of improvement reported in the first quarter of 2021 should accelerate further as the rate of economic growth, supported by the broader reopening of the economy, continues to increase, with such results expected to be reflected in second quarter numbers that will soon be reported.
In a recent blog, we discussed how some high yield managers, facing increasing pressure from their clients for greater integration of ESG in the management of their portfolios, take shortcuts in an effort to accomplish their ESG objectives. This week, we further explore some of the problems and intracacies associated with “shortcut” approaches.
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.
