White is a portfolio manager in charge of $1.1 billion in high-yield assets at Fort Washington Investment Advisors, a buy-side firm based in Cincinnati.
What is the fund's strategy?
Our fund focuses on the higher-quality part of the market. Historically, the returns have been much better in that part. Double-Bs and single-Bs have considerably higher Sharpe ratios than triple-Cs, indicating there is a much better risk/return trade off in the higher-quality part of the market. We believe that the triple-C part of the market essentially has equity-like risk and we feel that if you want to take equity-like risk you should take it where you are more appropriately compensated for it, which is in the equity market. Even on an absolute basis over extended periods of time, triple-Cs have lagged the overall market.
What are the major challenges you face in the
current environment?
One major challenge is the difficulty in finding attractive paper to purchase. Currently, there is a large supply/demand imbalance that it makes it difficult to supply an adequate amount of paper in the new issue market. Most new issues are severely allocated, making it difficult to build a core position. Additionally, higher-quality paper that we tend to focus on is coming at rather low absolute yields.
What sectors do you favor and why?
Our sector allocations tend to be rather stable over the full cycle. We tend to always favor those sectors that have less volatility and we are underweight in those sectors characterized by volatility and cyclicality. Although we might lean one direction or another based on our economic outlook, we tend to build portfolios for the full cycle and, given our high-quality bias, we tend to focus on sectors that are more stable. Sectors we tend to favor would be healthcare, media, some consumer products and utilities. We tend to generally be underweight in some of the more-cyclical sectors such as telecom, technology, steel and retail. Those over and underweighted tend to be long-term in nature.
What is your outlook on spreads, and why?
I can't make a case that spreads are going to tighten much from here, if at all. We are near the all-time tights in spreads and the all-time lows in yields. But, I don't foresee significant spread widening. I think that the high-yield market should generate attractive returns particularly compared to other fixed-income asset classes, but these returns will be comprised primarily by yield. The economy seems strong, balance sheets are improving and there does not appear much risk in upsetting that situation. But, alternatively, it is mathematically difficult to generate significant returns being double digit at this point.
Do you think the recent back up in the high-yield market will continue?
I think the recent backup was healthy. It was based more on valuation and not necessarily on fundamentals. I would be more concerned if the backup was a function of weakening in the economy or weakening fundamentals of issuers in the high-yield market. But since it seems to be primarily based on valuation, I think that it was appropriate and does not foretell longer-term negative returns.
Do you feel you are protected enough with current
covenant packages?
One concern that we have with respect to covenants in the high-yield market is that there is a large number of bonds previously investment grade-rated that have weaker covenants than high-yield bonds do. Those fallen angles have an added layer of risk that needs to be accounted for.
What is your view on dividend deals?
We surely are not a big fan of them. I think they are one of the main reasons for the recent backup in spreads. It was nice to see the high-yield market show some discretion with respect to those structures. We prefer more-traditional uses of proceeds, such as expansion and other business-enhancing prospects.
Any other interesting structures these days?
Along the lines of the last comment, we have begun to see some holding company zero structures. Again, this is not necessarily a structure we find palatable and we will continue to avoid those types of structures.