Throughout its 30+ year history, the high yield market has often been viewed as a confusing or an alternative asset class. However, the reality is that this is a large, developed and liquid asset class. We have provided this “owner’s manual” for those investing in the high yield market. In it we detail the history and development of the space, discuss the legislation and ratings methodologies that have created opportunities in the marketplace, and compare historical risk adjusted returns with other asset classes. Additionally, we describe our own investment philosophy and approach to the high yield market. We believe that the benefits from investing in the high yield market are undeniable.
We were pretty convinced a year ago that the entry point into our asset class would turn out to be a once in a generation opportunity. What we did not expect was to see this play out in so short a time frame. As we remain surrounded by massive and growing unemployment, a collapsed real estate market and a host of other economic issues, corporate credit investors seem to find themselves in something of a nirvana. The reality is many balance sheets are incredibly liquid and being de-levered as management teams focus on survival not growth. Companies have been stress tested like never before and money flows into high yield are likely to increase as institutional investors seem to be under-allocated to the asset class.
We believe that the fixed income asset class is in the midst of being re-defined, as investors are turning away from their obsession with pigeonholing investment managers into style boxes in favor of absolute return philosophies. With this, we believe that our fundamental investment philosophy of viewing corporate debt instruments as either AAA or D will perhaps get some respect. Additionally, in looking at the data, we don’t see a place for a significant allocation to investment grade debt; rather a combination of higher yielding corporate bonds with treasury bonds as a hedge seems a more effective strategy.