Peritus takes a value based, active credit approach to investing in the corporate credit market, primarily focusing on high yield bonds and leverage loans, which earn what we view as a high current yield. We largely forego new issue participation, favoring instead the secondary market where we believe there is less competition and more opportunities for capital gains. We de-emphasize relative value in favor of long term absolute returns. We view our job as managing risk, not managing money. While our goal is to generate attractive returns via tangible yield and potential capital appreciation, we believe our performance stems as much from what we don’t buy as it does from what we do buy.
In essence, avoiding credit problems is the key for us. As part of this, we view credit as AAA or D. If we expect the company to be able to pay its bills over the life of the bond, to us it is an AAA credit. If we don’t, it goes into the D bucket and we avoid the name. Many investors have restrictions based on ratings that limit their investment opportunities. However, we believe the ratings process to be massively flawed and we do not restrict our portfolios by ratings. Our view is that the rating agencies are reactive, backward looking, and too focused on the size and longevity of a company. Instead, we exploit the fact that most fixed income investors continue to use ratings as one of their primary investment tools. Through the years we believe that our focus on the fundamentals of a business instead of the ratings has been incredibly helpful in allowing us to add value for our clients. Furthermore, investment vehicles tracking the indexes don’t have the ability to select only the credits that fit that “AAA” profile, which we feel puts active managers like Peritus at an advantage.
In terms of what we do buy, we focus on the credits we feel offer the best risk/return profile, paying particular attention to the companies that have a product or service that is essential or recurring, hard asset values that provide some support for the company’s value, a manageable capital structure, and/or a stable revenue stream or an adjustable cost structure should revenues fall. Additionally, excess liquidity and the ability for the company to generate free cash flow are other important areas of focus for us. After all bills are paid (including working capital and capital expenditures), we need the business to have money left over, which provides a margin of safety for us as debt investors. We generate our own investment ideas and do all of our own research internally.
Several over-arching themes dominate the investment philosophy at our firm. Unlike many of our competitors, Peritus does not hold any preconceived notions or restrictions on what industries, ratings or even subordination we will buy. We let Mr. Market determine where value exists for us at any given moment. All industries, ratings and subordinations will be considered when we manage our portfolios. Additionally, while many consultants and investors like to pigeon-hole managers, Peritus is eclectic in its approach and process. We are not top down or macro in our approach nor are we purely bottom-up fundamental investors. We have found putting blinders on inhibits our performance, so feel the best approach to investing is melding the best of both. Furthermore, we let the value we see in the market dictate the portfolio’s diversification, rather than accepting less desirable securities just for the sake of diversification.
We believe that to be successful in the credit markets, we must look at debt as senior equity. We do not stop at the traditional credit analysis, but look at a complete appraisal of the business’ intrinsic value. In essence, successful investing marries the process of financial analysis, determining valuation, and understanding market psychology.