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US HIGH YIELD CREDIT

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We believe that bottom-up fundamental analysis focusing on the quality of an issuer’s underlying business has the potential to generate competitive returns over time.

Mark E. Durbiano, CFA, MBA

Senior Vice President, Senior Portfolio Manager, Federated Hermes Inc.

Why us?

Seeking outperformers

By focusing on the quality of an issuer’s underlying business and its ability to generate predictable free cash flow

A different perspective of quality

By developing a more robust, forward-looking view of quality compared to rating agencies

Experienced team

A US-based skilled and integrated 14-person team with an average industry experience of more than 20 years

No style drift

Invests in US-dollar-denominated high-yield securities with a minimal allocation to cash

Relative value

By searching for strong operating companies across the entire high-yield spectrum that can service an aggressive capital structure

Lead manager’s strong track record

The US High Yield Credit strategy, managed by Durbiano, has delivered strong risk-adjusted returns since its inception in 1978

Why now?

Against the uncertain backdrop of the coronavirus crisis and the looming US presidential election, our team have vast experience in managing high-yield assets through various crises and periods of uncertainty. For example, our lead portfolio manager has managed the US High Yield Credit strategy since its inception in 1978 – and during this time, the strategy has generated strong risk-adjusted returns through various and sometimes violent market cycles, generally with a lower beta than the market. What’s more, each member of the 14-person, US-based team has an average investment experience of more than 20 years.

In addition, we believe our distinct view of quality can help uncover relative-value opportunities that would likely be missed by relying solely on rating agencies’ assessments.

Looking beyond ratings

The first thing most investors think of when they hear about a bond’s quality is a rating agency’s grade. The letter grades that agencies assign to an issuance’s creditworthiness remain the most pervasive means of valuing it. But this is not the only way to define quality. When we use the term, we are referring to the quality of an issuer’s underlying business. Business quality and rating-agency quality are fundamentally different, and our experience in the former has played a large role in our success in managing high-yield assets since the late 1970s.

To find out more about our US High Yield team value bonds, please read our commentary.

Investment philosophy and process

We believe that bottom-up, fundamental analysis which focuses on the underlying quality of an issuer’s business can lead to strong, consistent performance within the high-yield market.

We aim to achieve this by searching the entire quality spectrum of the US high-yield market. Through our in-depth combination of qualitative and quantitative analysis, we seek to identify companies that demonstrate a solid operating model which can deliver stable and predictable free cash flow.

We also consider ESG factors in our investment process to uncover potential sources of tail risk. The US High Yield Credit team has developed a proprietary framework, the DESG rating system, which focuses on Debtholder Stewardship in addition to E, S and G, considerations. Given the complex leveraged capital structures of high-yield companies, we consider the analysis of how management and boards treat bondholders as another piece of the ESG mosaic (for more information, read our commentary ESG integration in Federated Hermes high-yield fixed-income strategies). In addition, we also work directly with EOS at Federated Hermes, our dedicated engagement and stewardship division, to gain unique insights into the implications of ESG issues on the industries and companies in which we invest.

Note: the US High Yield Credit Strategy is represented by the Federated Hermes High Yield Fixed Income composite.

Composite gross rolling year performance

  31/03/2019-31/03/2020 31/03/2018-31/03/2019 31/03/2017-31/03/2018 31/03/2016-31/03/2017 31/03/2015-31/03/2016
Federated Hermes US High Yield Strategy (%) -5.74 6.48 3.55 14.60 -1.00

Source: Federated Hermes, as at 31 March 2020. Returns are in USD gross of fees. Composite inception date: January 1978.

Past performance is not a reliable indicator of future returns

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investment overseas may be affected by currency exchange rates.

Composite High Yield Fixed Income Composite
Index Bloomberg Barclays US HY 2% Issuer Cap. Index
Periods Ending 03/31/2020

Annualised Returns (%)
  Composite Gross Return Composite  Net Return (Assuming Maximum Fee) Index
Q1 20 (12.02) (12.13) -12.68
YTD (12.02) (12.13) -12.68
1 Year (5.74) (6.21) -6.94
3 Years (Annlzd) 1.29 0.79 0.76
5 Years (Annlzd) 3.35 2.83 2.78
10 Years (Annlzd) 6.26 5.72 5.64
15 Years (Annlzd) 6.81 6.12 6.35
20 Years (Annlzd) 6.66 5.88 6.54
Jan 78 - Mar 20 (Annlzd)^^ 9.10 8.20 N/A

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