The strategy offers the potential to generate competitive total return from both income and capital appreciation by tactically managing exposure to floating rate bank loans and high yield bonds (0%-100% in either asset class). Interest rate risk is limited by keeping duration at three years or less. The flexible credit team employs a relative value approach centered on fundamental analysis, loss avoidance, diversification, and active management.
Step 1: Top-Down Sector and Industry Analysis
- Relative value determines the allocation between bank loans and high yield bonds
- Indusry bias and analysis such as competition, industry cycle, secular trends, and relative value determine industry positioning
- Formal monthly Newfleet multi-sector meetings strengthen decision-making
Step 2: Bottom-Up Security Selection
- Perform in-depth fundamental credit analyses including business drivers, financial analysis, management experience, capital markets access, liquidity, and enterprise value
- Look for companies with a competative advantage, sustainable capital structure, stable cash flow, and a bias to deleverage
- Coverge of both loans and high yield allows for determination of best risk-adjusted relative value within the capital structure
Step 3: Portfolio Construction, Opportunistic Trading, and Oversight
- Construct diversified portfolios across credit ratings, capital structure, issuers, and industries
- Dedicated traders actively take advantage of mispricings, market dislocations, and special situations
- Constant evaluation using technology, proprietary credit monitoring tools and research database provides early detection of potentially deteriorating credits or profitable trading opportunities
Important risk considerations
- Credit & Interest: Debt securities are subject to various risks, the most prominent of which are credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt securities may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities.
- Bank Loans: Loans may be unsecured or not fully collateralized, may be subject to restrictions on resale and/or trade infrequently on the secondary market. Loans can carry significant credit and call risk, can be difficult to value and have longer settlement times than other investments, which can make loans relatively illiquid at times.
- High Yield-High Risk Fixed Income Securities: There is a greater level of credit risk and price volatility involved with high yield securities than investment grade securities.
- ABS/MBS: Changes in interest rates can cause both extension and prepayment risks for asset- and mortgage-backed securities. These securities are also subject to risks associated with the repayment of underlying collateral.
- Foreign & Emerging Markets: Investing internationally, especially in emerging markets, involves additional risks such as currency, political, accounting, economic, and market risk.