DDJ Capital Management Blog

Of all the misconceptions regarding the CCC-rated segment of the high yield market, DDJ believes one of the most common is that all CCC-rated bonds have essentially the same level of risk.

One of the core tenants of DDJ’s investment philosophy is that the CCC-rated segment is one of the most inefficient of the high yield market. Why is this segment inefficient? We believe that it is due in part to the misconception listed above. As a result of the perceived riskiness of the CCC-rated segment, investment guidelines for many high yield portfolios commonly restrict or prohibit CCC-rated holdings, resulting in the CCC-rated segment of the high yield market being less researched relative to higher quality segments. In simple terms, fewer investors targeting this area of the market results in less efficient pricing and a slower incorporation of new data/events into market prices.

In a recent Q&A conducted with our Portfolio Managers, the question was posed:

“Are there any aspects of your investment team or process that you might not find at traditional high yield managers, but you believe contribute to your success?”

While there are many aspects of our investment team and process that we believe offer DDJ competitive advantages, one that we like to highlight is our in-house legal expertise.

DDJ Capital Management recently recorded an audio market update with Sameer Bhalla, Senior Research Analyst with 16 years of industry experience in the Energy space, to provide an update on the crash in oil prices and its implications for energy companies within the high yield universe.

One of the subjects that Mr. Bhalla and his co-host Stacy Havener, Founder & CEO from Havener Capital Partners, discussed was West Texas Intermediate (WTI) oil prices recently turning negative and the factors that led to this unprecedented development. Below is an excerpt from their conversation:

“On the supply side, the supply continues to come on. If you have oil and gas wells that are producing today, you can't immediately shut those off. Those take time to run off, and wells that were drilled a month ago will continue to come online and produce in the high level, so what you've seen is this imbalance between production that continues to increase – these volumes that continue to increase – plus the supply actions that OPEC took in March to increase their production by four to five million barrels, and then you have the demand loss. So, the numbers are staggering and basically unprecedented.

DDJ Capital Management recently recorded an audio market update with firm founder, Portfolio Manager and CIO David Breazzano to discuss the extreme volatility and liquidity challenges in the high yield market. A question was asked about where the team is currently finding strong risk-adjusted investment opportunities.

Listen to Mr. Breazzano’s response. 

DDJ Capital Management recently recorded an audio market update with firm Founder, Portfolio Manager and CIO David Breazzano to discuss the extreme volatility and liquidity challenges in the high yield market. A question was asked about the downgrading of BBB-rated bonds (aka “fallen angels”) into the non-investment grade universe and what kinds of disruptions and opportunities this activity will create.

Listen to Mr. Breazzano’s response from the call on March 27, 2020. 

There are many potential benefits of including a dedicated high yield portfolio as part of a long-term asset allocation, including improving its risk-adjusted-return profile, increasing diversification, and providing a consistent source of meaningful cash generation. In addition, as we discuss below, we believe that the high yield market (comprising both high yield bonds and bank loans) has structural inefficiencies that can be exploited through rigorous, bottom-up fundamental research and a risk management process focused on minimizing credit losses. Our view is that high yield is an asset class in which a skilled active manager can generate significant and sustainable outperformance over the long-term.

As displayed in the chart below, the high yield market, as represented by the ICE BofA U.S. High Yield Index, has generated impressive returns over the last 30-years with significantly less volatility than equities.

By David Breazzano, President, Chief Investment Officer, Portfolio Manager

In 2018, the high yield market ended the year on a low note. A negative return in December capped off one of the weakest quarters of high yield bond performance in history. Of course, this negative performance was not isolated to the high yield market. Rather, concerns surrounding trade tensions, economic growth and the trajectory of monetary policy weighed heavily on markets ranging from corporate bonds to equities. Many market observers were curious whether 2019 would bring more of the same or if markets would reverse course.

By way of background, I am by nature an optimistic person. This may seem counterintuitive given my chosen profession; after all, when it comes to investments in the high yield market, one must always be focused on what can go wrong. Having said that, I cannot help but view things through the prism of positivity. So, even in the face of dreadful performance to end 2018, I was cautiously optimistic about the prospects for the high yield market in 2019.

The Portfolio Managers of DDJ’s U.S. Opportunistic High Yield Strategy, David Breazzano, Ben Santonelli and John Sherman, recently sat down and answered a handful of questions related to investing in the high yield market and DDJ’s distinctive investment philosophy.

This week, we highlight a question involving an area of the high yield market that is often ignored by the largest high yield managers: middle-market issuers.

The Portfolio Managers of DDJ’s U.S. Opportunistic High Yield Strategy, David Breazzano, Ben Santonelli and John Sherman, recently sat down and answered a handful of questions related to investing in the high yield market and DDJ’s distinctive investment philosophy. One of these questions related to the teams of people on the other side of the investment equation.

Happy New Year!

Since we launched our blog last September, we have received a lot of positive support. We sincerely appreciate you taking time out of your day to read our thoughts on the market.  

Below, we have highlighted our three most popular blog posts from 2019. If you have a topic you would like for us to cover, please contact us.  We appreciate your feedback.

Cheers to a new decade!