Furthermore, when discussing yields it is also important to understand that in many cases the stated yield-to-worst isn’t necessarily the yield an investor would expect to realize from their investment. For instance, when we look at a credit we certainly look at the yield-to-worst but we also determine our own expectations for the credit given the company’s fundamentals and potential catalysts—an “expected yield,” which in some cases may be higher than the yield-to-worst.
Capturing capital gains is also an important piece of realizing an expected yield. In the current market environment where we are seeing bond prices run well above call prices, active managers have the ability to lock in these premiums and reinvest proceeds into situations with a lower dollar price and a better expected yield going forward.
For example, in a security now trading at $110, and active manager would be able to sell at the price and buy a new security closer to $100; whereas an index-based, passive product would instead ride a security to $110 and then stay in it until the security is called, typically between $101 to $105, or possibly until the security matures at $100 (depending on the vehicle’s mandate), potentially capturing a lower expected yield for the life of the holding. We believe that the ability to sell is important in realizing capital gains and potentially increase your expected return.
It’s worth repeating: while the high yield indexes are considered representative of the high yield market, we do not feel they are representative of the true opportunity we see today in the high yield market. This is a market where we believe that generating decent yields requires hard work: active managers digging to find names and then doing the research on the names to determine the best opportunity for return given the risk component.
For managers and investors willing to do the work necessary, we continue to believe there are plenty of opportunities for attractive yield in the high yield space, and this is over a $1.3 trillion market, so there is plenty to work with. Furthermore, as active managers, we have the additional flexibility to invest in loans, bonds, and dividend paying equities which can enable us to drastically increase the available market size far beyond that for bond-only or loan-only index-based products.
1 The Barclays High Yield Index is an unmanaged index considered representative of the universe of U.S. fixed rate, non investment grade debt. One cannot invest directly in an index. Data as of 6/9/14.
2The Bank of America Merrill Lynch High Yield Index monitors the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. Index data sourced from Bloomberg. Data as of 6/9/14.
3The Barclays High Yield Index is an unmanaged index considered representative of the universe of U.S. fixed rate, non investment grade debt. One cannot invest directly in an index. Data as of 6/9/14. The Bank of America Merrill Lynch High Yield Index monitors the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. Index data sourced from Bloomberg. Data as of 6/9/14.
This article was written by Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (HYLD).