Finally, some also attribute the recent selling pressure in the high yield market to global weakness and a general risk-off trade. Also mentioned are certain industries under severe pressure. This seems more of a rationale argument, as we can’t deny that we are certainly seeing economic weakness in certain areas of Asia and Europe, not to mention the issues in the Middle East, Russia, and Western Africa. But we argue this is why we view active management as so essential. Active managers can avoid names that would have large exposures to these areas facing weak economic activity or other geopolitical issues, and focused more on North American-focused companies, which makes up the predominant portion of the high yield space. And active management is equally important in assessing industries under pressure. Our experience has been that industries facing challenges can actually create opportunities for active managers that can parse out the strong players that they view as undervalued and likely destined to benefit from a change in the competitive landscape, from the weak players that are likely destined for failure.
At the end of the day, we don’t see a sizable interest rate hike on the horizon unless we were to see a strong recovery in the economy, and if that is the case then we believe high yield corporate credit stands to benefit from the improved economy and has historically managed rising rates well. Certainly we don’t see a rising rate scenario as an automatic trigger for defaults to quickly spike—defaults generally increase during times of systemic issues, which we don’t see on the horizon, not to mention the forward maturity schedule is very manageable. We feel that the recent selling pressure creates an even better entry point in terms of purchasing credits and can help to increase potential yield and capital gain generation for investors.
1The Credit Suisse High Yield Index is designed to mirror the investible universe of the $US-denominated high yield debt market.
2The Credit Suisse High Yield Index is designed to mirror the investible universe of the $US-denominated high yield debt market. Level as of 9/25/14.
3High yield market size of $1,588 billion, Acciavatti, Peter D., Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update.” J.P. Morgan, North American High Yield and Leveraged Loan Research. June 27, 2014, p. 5.
This article was written by Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisory firm of the AdvisorShares Peritus High Yield ETF (HYLD).