Guiding Principles: High Yield Investing
Patrick:
At Neuberger Berman, our guiding principles for investing in high yield is we're looking to give investors downside protection but also upside participation.
Dan:
When we look at the high yield market we try to outperform through a full market cycle. And what I mean by that is we tend to outperform when the default rate rises, and then be more like a market performer as we run into more bullish times.
Each of the portfolio managers on the team has well over 20 years’ experience. And as a result we've seen almost every cycle you could see over the past 20 to 30 years in the high yield market.
Patrick:
From a top-down perspective, we make a call on where we are in the credit cycle.
Dan:
We use at the center of the process what we call credit best practices, which is what Tom O'Reilly started 18 years ago here when we started the high yield business. We agree up front what makes a good high yield credit, and basically you cover everything that a portfolio manager would want to know.
There is roughly 1,100 different issuers in the high yield index. We focus on the largest 600 of those. That still represents about 85 percent of the dollar value of the index. So we don't give up a lot of dollar value of the index, and are able to focus on the more important larger issuers.
Patrick:
We have one of the largest research teams in the business. We have over 20 research analysts, all of whom have been trained in our credit best practices checklist.
Every name in the portfolio has to be approved unanimously by the entire credit committee.
Equally important is our monitoring. Part of the reason we have such a large credit staff with so much experience is they have followed these companies very deeply for an extended period of time. They meet with these companies at least twice a year, face-to-face to ensure that we're on top of the companies’ fundamentals, we can be proactive, and get out of companies at the first sign of trouble.
Dan:
We focus on cash flow. We also look at asset value as a secondary source of debt repayment. Management gets a grade in this process. We believe you can't buy good bonds from bad managers.
Patrick:
At Neuberger Berman, we believe that if an investor is going to hire us for high-yield bonds, we're going to give them a high-yield bond portfolio.
It's not up to us to allocate assets for our client; it's up to them to asset-allocate towards high yield, and we provide them the best performance we can in that product.
Dan:
We are also invested in our own strategies, so we benefit by the same performance that our clients do.
Patrick:
The reason that I like investing in high yield – and I've been investing in this space for over 25 years at this point – is that I think it's a sector where you can add value over time versus the benchmark and versus competitors by focusing to credit fundamentals.
Dan:
The large team and the team orientation of this high yield process was very exciting to me. It is one of the most extensive operations in the high yield market across the business.
Patrick:
What I really enjoy about working with my team at Neuberger Berman is that we've worked together for a very long time. There's a lot of continuity.
If you have a disciplined process and are part of a good team, you can do a really good job for your clients consistently over time.
An investor should consider each Fund’s investment objectives, risks and fees and expenses carefully before investing. This and other important information can be found in the Fund’s prospectus or summary prospectus, which you can obtain by calling 877.628.2583. Please read the prospectus and summary prospectus carefully before making an investment. Investments could result in loss of principal.
A bond’s value may fluctuate based on interest rates, market conditions, credit quality and other factors. Generally, bond values will decline as interest rates rise. You may have a gain or a loss if you sell your bonds prior to maturity. Bonds are subject to the credit risk of the issuer. High yield bonds, also known as “junk bonds,” are considered speculative, involve greater risks, may fluctuate more widely in price and yield, and carry a greater risk of default, than investment-grade bonds. Floating rates on senior loans only reset periodically, such that changes in prevailing interest rates may cause fluctuation in the Fund’s net asset value (NAV) and such securities may be more susceptible to adverse economic, business and other conditions than those with fixed rates, which could reduce demand for loans. No active trading market may exist for many loans, loans may be difficult to value and many are subject to restrictions on transfer or resale, which may result in extended trade settlement periods and may make certain investments less liquid and also prevent the Fund from obtaining the full value of a loan when sold.
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