US High Income Bond Portfolio (USHIBP)
Due to the lack of sales and research coverage of certain high-yield credit securities, the Fund invests in corporate bonds with yields notably higher than larger index constituents of commensurate risk. This ability to capture additional yield, while still protecting downside risk, is invaluable considering the current Zero Interest Rate Policy (“ZIRP”) environment.
Capital structure details are often overlooked or misunderstood
Capital flows into leveraged credit markets have been almost indiscriminate, as investors seek yield, often at the expense of fundamental research and the protection provided by well-structured securities. Further, flows have been concentrated in a relatively small number of issuers and securities, with little regard for the structure, priority, or contractual obligations of those instruments. We believe credit market exposure should be more thoughtful as risk return profiles have been distorted by technical conditions; and periodic market technical conditions can alter the risk-return profile of many bond issues as fundamental and structural evaluation is ignored. Investment managers with an edge in fundamental credit research and capital structure analysis, who identify mispriced securities, such as those secured by valuable collateral or protected by strong covenants that trade at a discount to par, should outperform the generic credit market throughout the credit cycle.
Idiosyncratic opportunities come from independent research
Researching under followed credits is time consuming and requires particular attention to fundamentals, covenants and structure. The lack of research sponsorship by large investment managers for many bond issues within complex capital structures has created significant inefficiencies and mispricing while also providing attractive return opportunities. By looking beyond the “on-the-run” large-cap credits, fundamental credit investors are able to identify specific securities that have superior risk-adjusted return potential.
The reduction of dealer risk capital has resulted in greater inefficiencies across the US corporate bond market
Wall Street dealers have significantly reduced their willingness to make two-sided markets and the level of their corporate bond inventories that have historically facilitated client trading. Instead, they are increasingly trying to match buyers and sellers, acting more as a pure intermediary rather than a provider of liquidity. Nimble credit investors with cash-flow generating, catalyst-driven trade ideas and the experience to source their own ideas have a distinct edge in this environment.
Newstar utilizes a fundamentally driven proprietary investment approach and comprehensive capital structure analysis that attempts to identify the best risk-adjusted return opportunities across the high yield market.
The US High Income Bond Portfolio is run with a long credit bias; however, risk is managed via cash management,active trading and portfolio hedges.