The current policies of major central banks around the globe has created an unprecedented low-rate environment which has perplexed even the most seasoned income-investors. With interested rates at home expected to remain low through 2015, many have been adding high-yielding bonds in addition to traditional dividend-paying equities in an effort to beef up their portfolio’s current income. The high yield corporate bond space in particular has garnered serious interest as this asset class has demonstrated the potential to deliver very handsome yields without handfuls of volatility. Tim Gramatovich, co-founder and Chief Investment Officer of Peritus Asset Management recently took time to discuss the unique features behind the AdvisorShares Peritus High Yield ETF (HYLD) as well as shed insights on the “junk bond” space [see Monthly Dividend ETFdb Portfolio].
Tim Gramatovich (TG): Peritus has been primarily an institutional and structured credit manager. We were looking for a way to penetrate the investment advisor/retail channel as we have a very good long term track record to exploit. We explored a variety of options including closed end funds and mutual funds but AdvisorShares convinced us that the ETF delivery mechanism was the way of the future. As an organization we tend to choose the road less traveled so we were excited to be the first and only actively managed high yield bond ETF.
ETFdb: Why does it make sense to use the ETF wrapper for investors looking to pursue this sort of strategy?
TG: We put ourselves in the investor seat and liked the transparency, liquidity and tax efficiency that the ETF structure offered. The structure offers tremendous accountability because investors know their holdings every day.
ETFdb: HYLD is currently the only actively-managed high yield bond ETF on the market. What was the inspiration behind this part of the product design?
TG: We all recognize that many markets are efficient. Investors should spend their management fees wisely. High yield is an asset class where tremendous inefficiencies exist and an active management approach is not only helpful, it is absolutely essential. We do not believe in a “beta trade” for high yield. Investors should own high yield for the significant yield advantages over all other asset classes. Active management is in place to not only assess what to buy, but what not to buy. In environments such as today, the discipline to say no to credits is crucial. This is where index products such as HYG and JNK fall down. They own everything irrespective of price or credit quality. This is not a good strategy.
ETFdb: Aside from generating income in this ultra low-rate environment, what else might investors find appealing about the high-yield bond space?
TG: Significant yield is still very much available for investors in the high yield asset class, but surprisingly to most people capital gains can still be generated. While spreads have compressed, most of this compression has come in the large, on the run names. This is because the aforementioned passive high yield ETF’s, set limits on what they can buy and size is their main restriction. Peritus believes that credit is effectively AAA or D. We look to build a portfolio of bonds that maximizes yield while minimizing risk. In today’s environment we are still finding plenty of bonds at discounts to par and/or their call price allowing for generation of capital gains as well as a very healthy current yield.
ETFdb: What are some of the longer-term trends that you are seeing in the global fixed-income market?
TG: I think the key trend in fixed income is demographics. Many people are calling the current environment a bond bubble. It might be a bubble but that bubble could last for the next 15-20 years. Baby boomers are just starting to retire and the demand for tangible returns through yield is in the beginning innings. The same story is being played out all over the developed world. Money flows will continue to be strong for the foreseeable future offset by struggling fundamentals in a “no growth” world. Bond picking (pure alpha) is what will separate performance going forward.
Bottom Line: Although the high yield corporate bond space has racked up an impressive track record in recent years, this asset class remains laced with risks that permeate passive, market capitalization-weighted “junk bond” ETFs. Luckily, the ETF universe is vast and investors have multiple options when it comes to tapping into “junk bonds”. The Peritus High Yield ETF (HYLD) offers a compelling strategy that sets it apart from competitors; HYLD’s actively-managed portfolio may appeal to income-hungry investors who are wary of following the index approach to access the high yield fixed income market.
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Disclosure: No positions at time of writing.
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