Aberdeen’s high yield team gives a brief overview of its investment process.
What is your investment process?
We are long-term buy and hold investors, not short-term traders. We look at the risks and strength of the underlying creditor protection and side-step complex instruments we do not understand. We look to avoid sectors that experience long-term structural decline, such as IT or technology companies, we prefer industries with a more mature profile. We build a portfolio based on conviction rather than benchmark weight but with enough diversification to limit the impact of defaults.
Meeting with company management is also important and in this regard we typically favor those with experience navigating through a full business cycle.
How do you choose which issues to invest in?
If we like a company then we look at the range of issues available in which to invest and on a valuation basis we decide which deals offer us the best opportunity. When we invest in senior or subordinated debt we look for certain capital structures.
For senior debt we look at bonds with a ratio of 1 to 4 times leverage and for a subordinated bond it is a ratio of 4 to 6 times leverage. When the market sells off senior debt becomes cheaper therefore allowing us to buy bonds relatively cheap while reaching our yield target. We regard non-index issues as a key part of our investment strategy.
This unconstrained approach allows us to benefit from yield pick up from some non- benchmark issues.
Do rating agencies influence your investment decisions?
While we are actively aware of company ratings and any potential hurdles that get highlighted by the agencies, we are not actively concerned as we conduct our own bottom-up research before choosing to invest. Our process is fundamentally driven, meaning that we carry out our own analysis in order to generate a much deeper financial understanding of a company. For example we occasionally find value in CCC rated bonds, yet just because the rating agency has given this bond a rating that reflects a high degree of risk it doesn’t necessarily reflect its true value. We will speak to the agency if they choose to upgrade or downgrade a bond we own and we may potentially view these actions as a trigger point to buy.
What experience does your team have in high yield?
Aberdeen has considerable expertise in this market, having managed a dedicated high yield portfolio for over 13 years. Our knowledge in this asset class is extensive, with over 50 years dedicated experience in high yield bond markets.