Levi has had a long career on the sell-side as an analyst, research chief and investment banker at Drexel Burnham Lambert, Merrill Lynch, Chase Securities and J.P. Morgan Securities. He has specialized in media, telecom and technology. Early this year Levi joined the buy-side to lead the high-yield effort at Advent, a $2.3 billion firm which had invested mostly in convertible bonds. In addition to managing the high-yield portion of the Advent Claymore Convertible Securities and Income Fund, he will manage two other funds that are just getting underway: the Advent Credit Opportunities Fund and the Advent High-Yield Strategy Fund.
Describe your investment philosophy.
In high-yield, our investment objective is straightforward: to provide better than market returns through a combination of current income and capital appreciation. What that really means is effectively focusing on better quality credits. Advent is an extremely credit driven shop. We're focused on two critical areas. One is cash flow from operations. We look for companies with stable to improving cash flow in fundamentally sound industries, or industries that are fundamentally improving. Secondly, we're focused on asset coverage. High-yield is an instrument for asset based lending, and the asset values of those credits must be solid.
In terms of strategy, we first become absolutely comfortable with the credit quality of an issuer, understand it, put it through a rigorous research process, and become comfortable with the asset coverage and the underlying asset support.
We are also aggressive in looking across the capital structure when investing in a credit that we like. The underlying principal here is get comfortable with the credit and then determine where in the capital structure is the best place to invest. Sometimes it's the senior notes, sometimes the convertible bond.
Do you expect the high-yield rally to continue?
Notwithstanding recent comments by Warren Buffett and others, we believe there is opportunity in high-yield to make better than historical average returns. Even with the sizeable run-up year to date, credit spreads are still at historically high levels and the market could still see further spread tightening. And with overall credit quality within high-yield having improved over last year and the decline in default rates, even if the market pays the coupon for the rest of the year it's still going to provide investors with a double digit return that may exceed equity returns over the next 12 months.
Do you have any restrictions with regard to the ratings of the companies in which you invest?
While we have few restrictions, the average credit quality is high single-B and we will buy triple-Cs or lower if we are institutionally comfortable with the credit. Ratings don't scare us. A bond has to pass our rigorous credit analysis.
Where do you see value in the high-yield market right now?
I look across the market and clearly sectors that have been oversold like telecommunications offer incremental value. There's been a terrible taint around the telecommunications sector, mostly for good reason, but we are seeing some fundamental credit improvement in places. We're seeing names that had been oversold improving in credit quality and still trading at historically cheap spreads. In the media sector there are names in broadcasting and publishing that still trade cheap on a relative value basis even though there's the prospect of more consolidation as a result ofFederal Communication Commission deregulation.
Any specific issuers in those sectors that you want to single out?
One name on the broadcast side we're comfortable with where you can still get outsized returns is Paxson Communications which is not only an asset play on a television broadcasting station, but as the first quarter 2003 numbers indicate, it's also a strong cash flow play.
On the telecommunications side a name we've liked Fairpoint Communications which is a rural market local exchange carrier with an improving credit profile. The company has dissolved its (competitive local exchange carrier) business and is focusing on its core bisiness, which is regulated telecommunications services in smaller markets. It's also a consolidation play.
Would you still consider adding to these names?
Yes. I think they have upside potential both in continuing spread tightening and even consolidation prospects.
Are there any people on the sell-side whose research you find particularly valuable?
In terms of strategists, those who focus on the macro issues in the high-yield market, two analysts in particular are effective. One is J.P. Morgan's Peter Acciavatti. Also,Christopher Garman at Merrill Lynch puts out strategy research on high yield which is extremely effective and insightful.
What sets them apart from the other strategists?
Garman for example uses multivariate analysis to assess whether the market is rich or cheap at any given point in time. He's good at assessing technicals: which sectors are momentum plays, which are laggards. Like his predecessor Marty Fridson, he's good at putting the high-yield market in historical context, finding analogues in the last 20 years to what we're experiencing today. Garman and Aciavatti both can have a strong sense of high-yield market history, price performance and technicals and they offer some very helpful tools for portfolio managers to allocate and invest.
Are there any major challenges you've had your first few months as you've been learning to adapt to the buy-side?
For one, we're seeing record new issue volume. May has been the second biggest month ever for new issue volume. There is very little time to absorb and understand the credit stories. Initially we had mostly add-on deals: existing issuers who were coming back to market, so most knew the credits. Now we're seeing more new issuers, that is, first time issuers in the high-yield market. That can be pretty challenging. You're being asked to assess a company and its management team, make credit decisions, absorb information about the credit and the industry.
Having been on the sell-side, it's challenging enough when you're responsible for deals you underwrite in your sector. You typically have months to work with an issuer and diligence the company and industry before a deal launches. On the buy-side when you're trying to run a diversified portfolio across lots of industries the challenge is pretty substantial to stay on top of all these things.
When deals are coming fast like this, the market has a tendency to be less discriminating. Credit quality among new issuers tends to be more uncertain because again a lot of people don't have the time to get entirely up to speed on names. You're not sure in situations like these what ends up slipping through the cracks, so at the end of the day these are more hazardous types of environments in terms of trying to ferret out problems.