So if these opinions have no value in forecasting where the security price is going and are not investment recommendations, what good are they? Candidly this is a question we have been asking for the past 30 years. We see the ratings agencies as reactive not proactive, yet many investors in fixed income rely almost entirely on these ratings in making investment decisions.
Yet to us, these ratings present an opportunity. Central to our core investment philosophy is a belief that the credit ratings process employed by the main rating agencies is flawed. Their algorithms tend to favor large enterprises with long histories.
Regardless of our belief, many institutional investors remain captive and constrained by this ratings process.
Their ability to include non-investment grade securities in a fixed income portfolio is severely restricted. Because of this, we believe that the high yield, or non-investment grade, bond and loan markets are inefficient and lend themselves to active management. Active managers have the ability to focus on investing in companies and industries – not on ratings, maturity, duration or subordination—allowing them to capitalize on opportunities other can’t or don’t.