Carl “Pepper” Whitbeck
- AXA Investment Managers
Lead Portfolio Manager / AXA IM FIIS US Short Duration High Yield fund Head of US High Yield, Portfolio Manager / Analyst 13 years of industry experience Carl is the Head of US High Yield and a portfolio manager/analyst with AXA IM. Prior to joining AXA IM in 2002, Carl was an analyst in the investment banking division of Lehman Brothers, where he performed financial analysis on companies in the consumer and retail sectors, and worked on a variety of M&A and high yield transactions. Since joining AXA IM, he has served in various capacities within the US High Yield team, including head of research, portfolio manager for US High Yield portfolios and co-portfolio manager for multiple Global High Yield funds. Carl received his undergraduate degree from Williams College and has the CFA professional designation.
The goal of our investment process is to identify inefficiently priced income streams across the full ratings and maturity spectrum in the high yield market. To take advantage of these inefficiencies we must fully understand the risks associated with a particular investment so that we can calibrate the appropriate amount of income required to fully compensate for the level of risk taken.
Our investment philosophy states that the key to providing superior long term returns in the US corporate credit market is to focus on compounding current income and avoiding principal losses through fundamental credit analysis that focuses on companies which have improving credit trends. Our philosophy is a recognition and understanding that we are investing in a portfolio of bonds, and, based on the long-term history of the market, returns been primarily generated by the compounding of coupon income, rather than price appreciation of bonds.
This investment philosophy is supported by the return history of the high yield market. In dissecting the long-term returns of the high yield market into what has been earned through interest income versus price appreciation, it is clear that it is the high income stream that drives returns over the long run.
Fundamentals in the US high yield market remain strong and default rate are forecast to remain at or near historical lows. However, we do not expect to see much additional spread tightening, as from a valuation perspective, high yield is fairly priced. There continues to be aggressive issuance in the new-issue market and most of these new issues tend to trade up in the secondary market. From a liquidity perspective, it remains easier to be a seller than a buyer in today’s high yield market.
While the market remains concerned as to US treasury rates, it is our general view that any near term rate increases in the US will be relatively benign. We project a slow rise in interest rates due to the reduction in Fed’s asset purchases that have already been announced, as well as expectations for additional reductions that will be announced throughout 2014. Even in periods of dramatic rising rates, the high yield asset class has outperformed other fixed income asset classes (such as investment grade). Because interest rates and spreads are generally negatively correlated, there is some absorption of the rate increase as spreads compress.
Even without substantial spread compression, high yield bonds should still outperform other fixed income sectors, particularly in a rising interest rate environment. From a relative value standpoint, US high yield remains attractive, currently offering a YTW of 5.2% with a DTW of only 3.6, versus that of 10-year Treasuries yielding 2.7% at a duration well over twice that of US high yield. In summary, while 2014 may not bring the double digit returns of recent years, high yield investors should still expect healthy total returns.
The biggest risk in today’s US high yield market is that if the US Federal Reserve while in the process of reducing the amount of extraordinary liquidity and initiating heightened forward guidance on the direction of rates somehow loses the confidence of investors, a risk-off attitude may very well prevail for a period.
We believe that an active bottom-up investment process will produce superior investment results over time. The goal of our investment process is to identify inefficiently priced income streams across the full ratings and maturity spectrum in the high yield market. To take advantage of these inefficiencies we must fully understand the risks associated with a particular investment so that we can calibrate the appropriate amount of income required to fully compensate for the level of risk taken.
Our investment philosophy is based on the protection of our clients’ asset, as we believe the key to superior long-term returns is the compounding of income and protection of principal. We avoid principal losses through a blend of bottom-up analysis with a strong top-down component, allowing us to recognize macroeconomic market shifts. After screening for fundamentally sound companies with improving credit trends, our detailed fundamental analysis focuses on three major components: Assessing, Valuing and Managing risk. Segmenting duration risk via barbell positioning adds further value.
Our proven investment process is robust, disciplined and repeatable, with a decision-making process characterized by “debated consensus”, ensuring traders, analysts, portfolio managers and strategist share accountability for performance.
Misunderstanding Financial Crisis, Why We Don’t See Them Coming by Gary B Gorton.
An interesting and informative take on the complexities of the US financial system and the short-comings of macro-economic models.
Predictably Irrational, The Hidden Forces That Shape Our Decisions by Dan Ariely.
When it comes to making decisions in our lives, we think we’re making smart, rational choices. But are we?
Fooled by Randomness, The Hidden Role of Chance in Life and in the Markets by Nassim Taleb.
What you think is the result of diligent work and reasoned thought and known occurrences may be nothing more than a random event.
US financial market news is routinely delivered by a number of sources such as The Wall Street Journal, The Financial Times, Bloomberg News and Reuters. For those more disposed to search for economic data, all of the Federal Reserve’s District Banks maintain very extensive information on their websites. Lastly, if your tastes are less main stream and more “the other side of the story” ZeroHedge.com offers an interesting assortment of opinions and theories.
This article originally appeared on March 18, 2014. Any views presented in this article are as of such date and are subject to change.
This article and the information provided therein are not a recommendation to purchase or sell any security, nor are they intended to constitute the marketing of, or a solicitation for investment in, any investment product.
AXA Investment Managers (AXA IM) is an active global asset manager with assets under management totalling over €534 billion as at September 2013. AXA IM is ranked as the 16th largest asset manager in the world and is wholly owned and supported by a major international leader in financial protection, the AXA Group.
We provide investment products and solutions for a range of institutional investors (including public and private pension funds, insurance companies, corporates, non-profit organisations and sovereign wealth funds), distributors (wholesale and retail) and family offices around the world.
Our multi-expert business model is composed of the following investment platforms: fixed income, equity, alternatives, and multi-asset client solutions. Designed to deliver customized and optimal investment solutions for our clients, our multi-expert model is globally supported by 2,100 dedicated professionals across 22 countries.
AXA Fixed Income
€376bn fixed income assets, €210bn credit assets, more than 100 investment professionals With approximately €376 bn in fixed income AUM, fixed income is a strategically important asset class for AXA IM, accounting for approximately two thirds of our total assets. We manage fixed income assets across the risk spectrum (government, inflation, investment grade credit, high yield and emerging market debt) for a wide range of institutional, retail and insurance clients around the world. Our global fixed income team is structured along two main investment lines: “Interest Rates” and “Credit”. This structure aligns the bottom-up and top-down aspects of market analysis with a rigorous and robust system of risk management, geared to providing attractive, risk-adjusted returns and promoting consistency of performance. We have local teams in Continental Europe, the UK, the US, and Asia, managing a wide range of strategies - from core domestic fixed income portfolios to specialist products at the forefront of innovation. Each regional team is able to leverage off the global shared resources of AXA IM while providing localized client servicing and relationship management, designed to meet local client needs:
AXA IM has been managing US high yield strategies since 2001 and has a proven and highly successful investment approach to managing portfolios, linking our top-down views to an active bottom-up investment process. This approach has been thoroughly tested in a wide array of market environments. AXA IM, Inc. managed over $32 billion in our US High Yield strategies next to $25.8 billion in US Investment Grade Credit as at September 2013.
We believe that an active bottom-up investment process will produce superior investment results over time. Our US short duration high yield strategy is unique in that it only invests in securities with expected maturities of 3 years or less. Due to the inefficiencies of supply/demand and credit seasoning within the short duration portion of the market, it provides a unique combination of potential return with diminished risk. First, the bulk of natural investor demand in US high yield is in the 5-10 year part of the curve, where the new-issue market is most active. This demand triggers a natural supply of shorter duration secondary ‘seasoned’ issues from more established high yield companies.
This slight imbalance creates opportunities to add exposure to companies with established credit records, many of whom would be higher-rated if they came to market today, at attractive yields and expected returns. Historically, US short duration high yield portfolios have had a yield that is over 70% of the yield on the BofA Merrill Lynch High Yield Master II, which represents the broad US high yield market, with only 30% of the duration exposure. Exploiting this inefficiency has been the foundation of the strategy which has consistently performed at or above the broader US high yield market with roughly 40% of the return volatility.
March 25, 2014
by Investment in Japan