I’m not a huge proponent of participation trophies and getting awards solely for being present. So when I heard the phrase, “Your best ability is your availability,” I had to really think about it. In certain situations, this can be true — some sports or card games require four players and three just won’t work. Finding someone who is available to round out the team or game is paramount.
However, in those situations, what if the fourth player really detracts from the experience — to the point it may not even be worthwhile to play? There may also be times that the fourth player adds exponentially to the experience — not only making it worthwhile to play but enabling everyone to become a better or smarter player.
In the latter scenario, the fourth player’s availability is clearly key, but his or her actual ability truly enhances the experience. That is the situation most people look for when competing or playing sports or games, and even in investing — finding that opportunity to become better and improve performance.
When it comes to investing, one’s ability to invest doesn’t really offer any value or differentiation as most investors have the same opportunity set in which to invest. Most potential investors can open a brokerage account and buy stocks pretty seamlessly, without much of a disadvantage compared to institutional investors.
However, many retail investors won’t have the opportunity to invest in IPOs. So in those situations, they don’t have the same availability of opportunities as large institutional or high-net-worth investors. Even more difficult for the retail investor is finding corporate bonds available at competitive prices. This market is generally traded over-the-counter (OTC) and, therefore, difficult to engage in without being an institutional investor that has access to the sales and trading desks.
As a high yield portfolio manager, I am constantly looking for opportunities to add value to our portfolios and for our clients. Simply showing up to play the game is not going to get it done. We are constantly looking for ways to outperform and differentiate. We have access to the sales and trading desks and can participate in the new issues that those banks offer. Compared to some of the larger fixed-income managers, our Strategy size allows us to be more nimble. Our size provides us with other opportunity sets that can make a meaningful difference in our performance.
There are investment opportunities in the smaller deal sizes that may often be overlooked or passed on by competitors, since they wouldn’t be able to obtain a large enough position to make it worthwhile. Our ability to participate and invest in these smaller high-yield bond deals can provide a meaningful advantage.
In this week’s chart inspired by JPM Research, we can see that these smaller deal sizes ($300 million or less and $300 million to $499 million) have materially outperformed the larger-deal-size investment opportunities ($1 billion to $1.99 billion and $2 billion-plus). Year-to-date in 2022, high-yield bond performance has steadily declined with the increase in tranche size, and this was also the case in 2021.
Moreover, since January 2017, we can see that the cumulative returns of smaller tranche sizes have outperformed those of other tranches. There are also time periods when investors are rewarded for investing in larger deal tranches. The key is having the availability of all options — and we are fortunate to be portfolio managers with all of those tranche options on the table, as they can all make a difference for our strategies.
Key Takeaway
Having the ability to invest in the entire U.S. high yield investment universe (across all tranche sizes) has offered a way to add value to performance. Not only is having the ability to invest important, but also the ability of those investments to be meaningful to performance. We can see that recently and with the outperformance of smaller tranche sizes since January 2017.
Going into choppier markets, those same deals may continue to outperform. The smaller tranches currently benefit from higher yields and potentially less trading in them, as investors look to sell the more on-the-run names first. I am constantly looking for the best investment opportunities and our research and due diligence on the issuers are paramount. That said, having the luxury of the full investment opportunity set provides more options to add value.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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