Time for an Allocation

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By: Tim Gramatovich, CFA, CIO for Peritus Asset Management, the sub-advisory firm of the AdvisorShares Peritus High Yield ETF (HYLD)

The size of the U.S. dollar high yield bond and loan market is over $3 trillion,1 representing nearly 30% of the corporate credit markets.2

There is an incredible size and depth of these high yield bond and loan markets, yet for some reason, it still seems to be viewed as almost a throwaway allocation in portfolios.  We would argue that these two asset classes should now be part of the new “core” of fixed income portfolios.

Historically “core” fixed income consisted of highly rated corporate bonds, government/agency securities and mortgages.  Holding Treasuries as a hedge against systemic risk is something we can support and understand.  Yet given the yields of today, how many investors are looking to build a core portfolio with these types of securities and yields of 2.25-3.25%?3

We would not view this as attractive and would expect many others would feel the same, yet many institutional investors seem to have ingrained in them to invest largely in these assets classes regardless of yield.  We would view this as outdated thinking, as today’s high yield bond and floating rate loan markets bear little resemblance to those of 25 years ago, when the market was just starting, yet many investors believe them to be “high risk” asset classes.

The high yield and floating rate loan markets are large and growing markets, with what we see as attractive opportunities for active managers who are able to look for value and identify potential mis-priced securities. 

1 High yield market size of $1,588 billion, Acciavatti, Peter D., Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li.  “Credit Strategy Weekly Update.”  J.P. Morgan, North American High Yield and Leveraged Loan Research.  April, 4, 2014, p. 43.  The Leveraged Loan Market Size of $1,527 billion as of 3/31/14, Blau, Jonathan, James Esposito, and Daniyal Khan, “Leveraged Finance Strategy Weekly,” Credit Suisse Global Leveraged Finance, June 27, 2014, p. 25.

2 Total U.S. Corporate Debt market size (figures for fixed income asset classes other than high yield and leveraged loans) sourced from SIFMA, “Outstanding U.S. Bond Market Debt,” as of 3/31/14.

3 Barclays Capital U.S. High Yield Index covers the universe of fixed rate, non-investment grade debt (source Barclays Capital).  U.S. 5 Year Treasury Note is the on-the-run Treasury (source U.S. Treasury).  Barclays Corporate Investment Grade Index consists of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and the quality requirements (source Barclays Capital).  Barclays Municipal Bond Index covers the long-term, tax-exempt bond market (source Barclays Capital). All data as of 9/11/14.

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