Fixed Income Management
High Yield Fixed Income
High-yield fixed income is appropriate for investors whose overall asset allocation suggests that a higher risk\reward strategy is warranted for a portion of their fixed income portfolio. At BHMS, we believe company research is our core strength. Therefore, our high-yield fixed income strategy emphasizes the opportunistic selection of securities, leading to more concentrated holdings than would typically be found in a more broadly-based high-yield market approach.
|Asset Class||U.S. Fixed Income|
|Investment Style||Bottom-Up Security Selection|
|Portfolio Benchmark:||Merrill Lynch BB/B|
Our investment philosophy is that an actively managed portfolio of high-yield bonds, selected through our team approach to fundamental research, can generate higher returns than a portfolio of investment-grade bonds, while maintaining prudent risk control. The bonds of companies with strong managements and solid fundamentals, when purchased at reasonable prices, will provide better returns with lower risk than the benchmark index. The key to success is to know when a high-yield bond of a good company becomes a good high-yield bond investment.
Our investment process balances the objectives of attractive yield, principal preservation, and capital appreciation to generate higher returns through the following three steps:
Step One - Our Relative Return Model ranks the expected one-year return in various bond market sectors and industries by calculating the expected return should yield spreads vs. Treasury bonds return to long-term averages. This analysis allows us to focus on sectors and industries of opportunity that deserve further company research.
Step Two - Security selection through credit research is a successful extension of sharing information between our equity and bond professionals. We begin with a qualitative review of a company and its management, as well as the industry. In most cases, our assessments are based on personal interviews. An in-depth discussion of the company with our equity research staff is an integral part of the process.
The quantitative analysis of the financial statements of companies includes the balance sheet, income statement, statement of cash flows, and related footnotes. We analyze factors such as trends in sales, costs, earnings from operations, and cash flow to project balance sheet strength, quality of assets, and debt structure. We primarily invest in companies that are "rising stars," not "fallen angels," looking to capture both higher yield and price appreciation as a company's ratings are upgraded toward investment-grade.
Sell decisions are based on a variety of factors. At the time of purchase, we set a price review level relative to the purchase price. A sell takes place when one or more of the following events occurs:
- A bond's credit spread tightens with no fundamental change in the company.
- Significant negative changes in fundamentals take place, such as a change in management, business plan, or in our quantitative ranking.
- When an issue reaches its price review level, our investment professionals thoroughly review the issue and decide whether to continue to hold the bond or to sell it.
Step Three - Portfolio construction uses various quantitative tools and guidelines to optimize risk vs. reward. Portfolios are "stress tested" vs. market indices to determine excess return (when our market assumptions are correct), and the downside risk (if our market assumptions are incorrect). For diversification, we target 35 to 45 issues in our portfolios. We prefer to purchase bonds in issues ranging in size from $250 million to $750 million in market value outstanding.
Portfolio Characteristics as of 9/30/2019
|Average Credit Quality||BB-||BB-|
|Average Weighted Coupon||5.94||6.05|
|Effective Duration (yrs)||2.64||3.19|
|Yield to Maturity||6.27||5.03|
|Performance as of 9/30/2019|
|Annualized Portfolio Returns (%)|
*3 Month returns are not annualized.
Performance is expressed in U.S. currency. Net-of-fee returns are calculated using a model fee. The model fee is based on a $100 million portfolio using our standard fee schedule. Index returns do not reflect transaction costs, management fees, and other expenses. BHMS' high yield returns from January 1, 2005 forward are those of the BHMS High Yield Fixed Income composite. Prior to this date, returns were those of a carve-out of all high yield bonds held in our Core Plus composite. Characteristics are presented as supplemental information to the BHMS High Yield Fixed Income composite. A full disclosure presentation may be accessed from the link above. Barrow, Hanley, Mewhinney & Strauss, LLC claims compliance with the Global Investment Performance Standards (GIPS®).
All institutional product information has been provided by Barrow, Hanley, Mewhinney & Strauss, LLC. Any questions about this material or requests for additional information may be made directly to the firm from the "Contact Us" link above.