US Middle Market High Yield Strategy
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The team aims to take advantage of pricing inefficiencies in the market, which would potentially provide them with the opportunity to earn superior returns. The team believes that the market may misunderstand and misprice the credit quality of certain high yield issuers, and in particular their default risk. Their fundamental, value-driven approach to investing gives them the ability to identify and take advantage of these situations. The team’s philosophy and fundamental style have not changed since the inception of the strategy.
The team believes that by using a disciplined and diversified approach, investing in the middle market segment in the U.S. can potentially provide investors with increased yields with limited volatility throughout market cycles and less duration risk than the broader high yield market.
Middle market issuers generally receive less scrutiny from market participants including credit rating agencies, underwriters and asset managers. The team believes one of the most attractive features of middle market bonds is derived from an investment manager’s ability to use diligent fundamental research to identify issuers with the strongest credit metrics and then look to benefit from the additional yield they can provide.
Focus on Middle-Market Issuers: |
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With its focus on middle market issuers, the Strategy offers a highly differentiated return profile relative to the broader high yield market and has historically generated attractive returns. |
Extensive Experience in Managing High Yield Bonds: |
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With track records dating back to the early 1980s, the MSIM High Yield team is one of the longest tenured high-yield managers. |
Global approach and perspective: |
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The MSIM High Yield team is one of the few managers with a truly global high yield capability with team members in New York, Boston, London, and Toronto. |
Structured Approach: |
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Our approach to high yield investing concentrates on generating returns through bottom-up security selection, but overlays this with a top-down macroeconomic and valuation framework to control overall risk appetite and sector selection. |
| 1 | Macro Analysis: |
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In order to determine the optimal positioning of the high yield portfolio, the process begins with a top-down, macroeconomic value assessment of the corporate bond universe, including a consideration of macroeconomic conditions, the corporate earnings environment, relative valuations and expectations of future default rates. Sector positioning results from the team's view on the economic cycle and is intended to allow them to focus on those industry sectors that they feel should do best given where they are in the cycle. Sector rotation generally takes place as their view of the economic cycle changes. Input from the Macro and Asset Allocation teams is useful in developing their assessment of broad economic conditions. |
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| 2 | Research: |
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The key to the portfolio management process is intensive fundamental credit research. Portfolio managers work closely with the credit analysts to generate new investment ideas and ensure continual monitoring of the credit quality of existing portfolio holdings. The team views the allocation to ratings as inherent to the fundamental credit analysis because they feel that middle market credits may have ratings that do not properly reflect their true credit quality. The team analyzes the company’s financial statements in an effort to understand whether its capital structure is suitable for the risk entailed in its business. A final key part of the analysis is to understand management’s intentions, in terms of business development and capital structure, and their ability to execute their plans. |
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| 3 | Portfolio Construction: |
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A portfolio is constructed with sector allocation driven primarily from bottom-up security selection (subject to risk management guidelines) with focus on middle market credits, with $150 million to $1 billion of total debt outstanding with 80-85% of the portfolio invested in middle market issuers and 15-20% invested in the top 100 largest high yield issuers. The team will also strive for the portfolio to be well-diversified at issuer and industry levels. |
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| 4 | Portfolio Monitoring: |
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The team continually monitors existing holdings to verify that our clients consistently benefit from our best investment ideas. The credit research teams have regular daily and weekly meetings in which opinions and ideas from all members are debated to ensure that portfolios reflect their best ideas. In addition to these formal meetings, there is constant daily dialogue. Internal debate is a key feature of our investing philosophy, ensuring investment ideas are tested thoroughly. Integral to the team’s portfolio construction process is the measurement and monitoring of market risk, duration and volatility, and credit risk. |
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| 5 | Risk Management: |
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The team views risk management as an integral part of our investment process. Based on this belief, they seek to protect their portfolios from a variety of risks through diversification, credit risk protection and liquidity. The goal is to ensure that portfolios are well balanced and that no single risk dominates the portfolio. In addition to powerful modelling systems with in-depth analysis to manage risks, the team uses a variety of controls to manage and monitor risks in clients' portfolios. Additionally, we are able to code the investment guidelines into the Blackrock Aladdin system for each portfolio we manage. This helps ensure that portfolios are run appropriately and that the Compliance and Risk Departments are able to monitor effectively. |
Team members may be subject to change at any time with notice.
Effective 23 October, 2024, Jack Cimarosa is no longer serving as Portfolio Manager on the Strategy.