US High Yield Bond Strategy

Strategy overview

The US High Yield Bond Strategy objective is to seek total return and current income. We aim to generate a total return in excess of that of the benchmark ICE BofA US High Yield Constrained Index by investing primarily in U.S. dollar-denominated high yield corporate bonds and other fixed and floating rate corporate securities. The strategy is designed to provide a concentrated, yet balanced, portfolio primarily focused on the traditional U.S. high yield bond investment opportunity set. We seek to add value through both the issuers we hold and those we avoid. As a result, the strategy incorporates our credit analysts’ “best ideas” with an emphasis on fundamental credit research and a flexible approach to portfolio construction.

Dedicated and experienced investment team

Kevin Loome leads a seasoned team of experienced high yield investment professionals, the core of which has been together since 2007 and has managed through multiple market cycles. The team is composed of credit analysts who serve as industry specialists and dedicated high yield traders who execute the investment team’s decisions. Our team focuses exclusively on the high yield market and takes a collaborative approach to the portfolio, ensuring that every idea that makes it into the portfolio has been thoroughly vetted by the entire team and considered from multiple perspectives. The team is backed by the client-focused, long-term approach and stability of T. Rowe Price.

Investment approach

Emphasis on credit research: The US High Yield Bond Strategy seeks to capitalize on market inefficiencies that may arise due to an issuer’s size, geography, lack of coverage by sell side analysts, or general misconceptions in the marketplace, which can create attractive relative value opportunities. We rely heavily on proprietary, fundamental, bottom-up credit research to drive our investment decisions, and, due to the inherent inefficiencies in the high yield market, we believe that most alpha generation in this asset class comes from credit selection. Research is conducted on a proprietary basis by our internal team of credit analysts. Each credit analyst covers a set of industries, which allows them to gain expertise with specific groups of issuers and within their industries of focus. The outcome of our research process is a proprietary credit rating; spread and total return targets; and an environmental, social, and governance (ESG) score for each issuer. The proprietary ratings help us be more forward‑looking so that we can identify inefficiencies, stay ahead of market trends, and anticipate ratings actions before they happen. Our spread and total return targets enable us to identify future potential sources of alpha and create a natural sell discipline in our portfolio. Because new issuance is a huge component of the high yield bond market, our credit analysts review and provide a written analysis—including a proprietary credit rating and spread forecast—for every new deal. This helps us stay on top of key market developments, facilitates access to company management teams, and provides a foundation of research even for deals we did not participate in, which we can revisit later if the investment’s relative value improves.

Concentrated yet opportunistic portfolio implementation: Our concentrated, U.S.-centric approach is focused on our highest-conviction ideas culled from a broad opportunity set. Within the US High Yield Bond Strategy, we have the ability to search across the full universe of high yield names to uncover opportunities by industry, credit rating, market capitalization, and issuer. Focused primarily on total return, the portfolio typically includes 75–200 high yield issuers that we believe offer attractive yield and price appreciation potential. Thus, we take a much more active and concentrated approach relative to the index and typical peer. In our view, this range of issuers strikes the right balance between providing an appropriate level of diversification while also enabling us to deliver a portfolio of best ideas for our clients. Our size and concentrated approach enable us to be flexible and nimble in adjusting the portfolio as market conditions evolve. Since bottom up, fundamental credit research drives investment decisions, we maintain flexibility within the portfolio construction process by allowing our credit selection decisions to influence portfolio positioning. For example, while we work within specific investment guidelines as related to industry weightings, these portfolio allocations tend to be the byproduct of a best ideas credit selection process that is industry agnostic.

Focused and collaborative investment process: Our team focuses exclusively on the high yield market and every investment idea that we generate as a team centers around this portfolio. All team members—the portfolio manager, credit analysts, and traders—actively participate in the investment process, which includes two or three individual credit reviews per week, monthly attribution meetings, and twice‑yearly off-sites where they analyze and review every portfolio holding. Our collaborative team and concentrated approach help ensure that every name in our portfolio has been thoroughly vetted and that no name gets overlooked or left unattended. Our process also creates constant and healthy friction for best ideas. In addition to conducting fundamental research, our credit analysts collaborate with the firm’s equity analysts and our dedicated ESG team to form a holistic perspective on the issuers in their coverage areas. For example, our analysts meet quarterly with T. Rowe Price Investment Management’s team of ESG analysts, who provide valuable company‑specific and portfolio‑level insights from an ESG perspective.

Disciplined risk management practices: Given asymmetric risks associated with high yield investing, we employ the philosophy that selecting winners is important, but it is equally important to avoid troubled credits. Our risk management process begins at the security level with the fundamental, bottom-up research conducted by our credit analysts. This research underpins our investment decisions and examines a broad array of industry and company-specific factors. At the strategy level, Portfolio Manager Kevin Loome manages risk through qualitative, quantitative, and independent analysis throughout the portfolio construction process. Thus, our investment team is fully engaged in the risk management process. Additionally, a strong sell discipline is applied when managing individual positions.

 

 

Risks – the following risks are materially relevant to the portfolio:

Credit—Credit risk arises when an issuer’s financial health deteriorates and/or it fails to fulfill its financial obligations to the portfolio.

Contingent convertible bond—Contingent Convertible Bonds may be subject to additional risks linked to: capital structure inversion, trigger levels, coupon cancellations, call extensions, yield/valuation, conversions, write downs, industry concentration and liquidity, among others.

Default—Default risk may occur if the issuers of certain bonds become unable or unwilling to make payments on their bonds.

Distressed or defaulted debt—Distressed or defaulted debt securities may bear substantially higher degree of risks linked to recovery, liquidity and valuation.

High yield bond—High yield debt securities are generally subject to greater risk of issuer debt restructuring or default, higher liquidity risk and greater sensitivity to market conditions.

Interest rate—Interest rate risk is the potential for losses in fixed-income investments as a result of unexpected changes in interest rates.

Liquidity—Liquidity risk may result in securities becoming hard to value or trade within a desired timeframe at a fair price.

Total return swap—Total return swap contracts may expose the portfolio to additional risks, including market, counterparty and operational risks as well as risks linked to the use of collateral arrangements.

General Portfolio Risks:

Capital Risk—The value of your investment will vary and it’s not guaranteed. It will be affected by changes in the exchange rate between the base currency of the portfolio and the currency in which you subscribed, if different.

Counterparty—Counterparty risk may materialize if an entity with which the portfolio does business becomes unwilling or unable to meet its obligations to the portfolio.

ESG and sustainability—ESG and Sustainability risk may result in a material negative impact on the value of an investment and performance of the portfolio.

Geographic concentration—Geographic concentration risk may result in performance being more strongly affected by any social, political, economic, environmental or market conditions affecting those countries or regions in which the portfolio’s assets are concentrated.

Hedging—Hedging measures involve costs and may work imperfectly, may not be feasible at times, or may fail completely.

Investment portfolio—Investing in portfolios involves certain risks an investor would not face if investing in markets directly.

Management—Management risk may result in potential conflicts of interest relating to the obligations of the investment manager.

Market—Market risk may subject the portfolio to experience losses caused by unexpected changes in a wide variety of factors.

Operational—Operational risk may cause losses as a result of incidents caused by people, systems, and/or processes.