The portfolio management team of the AdvisorShares Peritus High Yield ETF (HYLD) highlight a prime example why active management is beneficial in high yield bond investing.
In one of our pieces last year, we had profiled Ally Financial as a prime example of why analyzing fundamentals and determining the appropriate price/yield are essential in high yield investing. Ally Financial is the former GMAC (General Motors Acceptance Corporation).1 It wasn’t that many years ago that this entity was on the brink and virtually non-functioning. But over the past couple years, it has been able to raise capital at yields that appear to make it nearly an AAA entity. Earlier this week, the company priced a $1 billion deal at a yield of 2.875%.
We have no particular fundamental take on this company, but Peritus has a philosophy that we rarely, if ever, invest in financials at any yield because to us they are effectively unanalyzable. You never know what these companies actually have on the asset or liability sides of the ledger. But this company is a single B rated financial issuing bonds at under 3%! Now we don’t have a formal definition of what we would consider high yield today (outside of the usual ratings silliness), but we can tell you that a yield under 3 or 4% certainly does not qualify as high yield in the Peritus book.
By our count, there are 15 tranches of Ally Financial bonds available in the high yield universe and most of those tranches trade at yield-to-worsts of about 1.75% to about 4.5%.2 Because it is such a large issuer, this company is widely held in the large passive high yield ETFs. A company that we see as virtually unanalyzable and at very low yield—this is a prime example of the types of credits that we, as active managers, are able to avoid. We certainly see better opportunities for our investment dollars and aren’t forced to invest in these sorts of seemingly unattractive bonds.
1Peritus has not owned, does not own, and is not making any recommendation to own or not to own the securities referenced.
2Statement based on the Barclays High Yield Index holdings and price as of 10/31/13.