Important Information
This information is provided for general educational purposes only without regard to your particular investment needs. This material, including any attachments or hyperlinks, should not be taken as investment or tax advice of any kind whatsoever (whether impartial or otherwise) on which you may rely for your investment decisions, nor be construed as an offer, solicitation or recommendation for any investment strategy, product or service. Investors should consult their financial and tax adviser before making investments in order to determine the appropriateness of any investment discussed herein.
Material authored by any particular Artisan Partners individual or team represents their own views and opinions, which may or may not reflect the views and opinions of Artisan Partners, including its autonomous investment teams or associates. Statements are based on current market conditions and other factors, which are as of the date indicated and are subject to change without notice. While this information is believed to be reliable, there is no guarantee to the accuracy or completeness of any statement in the discussion.
All investments are subject to risk, which includes potential loss of principal. Past performance is not indicative of future results.
This material may reference index or other information that is subject to copyright by its respective service provider, including the following: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used to create indices or financial products. This report is not approved or produced by MSCI. Frank Russell Company ("Russell") is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell's express written consent. Russell does not promote, sponsor or endorse the content of this communication. The herein referenced S&P index ("Index") is a product of S&P Dow Jones Indices LLC ("S&P DJI") and/or its affiliates and has been licensed for use. Copyright © 2024 S&P Dow Jones Indices LLC, a division of S&P Global, Inc. All rights reserved. Redistribution or reproduction in whole or in part is prohibited without written permission of S&P Dow Jones Indices LLC. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"). None of S&P DJI, Dow Jones, their affiliates or third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. Source ICE Data Indices, LLC, used with permission. ICE Data Indices, LLC permits use of the ICE BofAML indices and related data on an "as is" basis, makes no warranties regarding same, does not guarantee the suitability, quality, accuracy, timeliness and/or completeness of the ICE BofAML indices or any data included in, related to, or derived therefrom, assumes no liability in connection with the use of the foregoing, and does not sponsor, endorse, or recommend Artisan Partners or any of its products or services.
© 2024 Artisan Partners. All rights reserved.
Finding Value Across the Capital Structure
One of my fundamental beliefs about investing in credit markets is it’s possible to find the best risk-adjusted return opportunities through fundamental credit analysis and value identification across the capital structure—flexing between high yield bonds and bank loans. I take a value investor’s approach to the below-investment grade market to look for opportunities tied to dislocation and mispricing.
My team and I deploy a rigorous, fundamental credit research process. We do independent work. We talk not only to company management, but also to suppliers, competitors, former employees and so on—and through those conversations, we’re able to triangulate independently what’s happening with a company. Based on our views that emerge from that research, we identify the piece of debt—bond or loan—that we believe offers the best risk-adjusted return. From there, we build a concentrated portfolio such that our best ideas can meaningfully impact performance through the cycle.
Key to this process is rigorous credit selection. Our fundamental and independent research allows us to form a view on the business’s trajectory. With that view, we anticipate how financial leverage will likely work through different parts of the capital structure. With each capital structure, we assess the maturity profile and the opportunities for the company to enhance its capital structure by performing a capital market transaction—and then, we identify a piece of debt with the best risk-adjusted return. In general, if we’re more constructive on material credit improvement, we’re likely to be more junior in the capital structure. Conversely, if we are less constructive on a company’s ability to improve its credit profiles, we’re likely to be more senior in the debt stack.
Capital structures evolve, and as covenants have become looser, debtors have had opportunities and flexibility they wouldn’t have had 10 or 15 years ago. That flexibility sometimes allows junior capital to potentially become more senior than the bond indicates. So there are times when a junior piece of paper can actually be refinanced into a more senior piece of debt because documents generally are more issuer-friendly. While we’re doing our deep dive on companies, we also do a deep dive on the documents to understand what flexibility the issuers have. This is important and worthwhile because the market often doesn’t anticipate those potential transactions—which creates potential opportunities for us.
I also believe investing across the capital structure helps dampen volatility. On a risk-adjusted basis, by investing across the capital structure, you can have different outcomes among securities of the same company. For example, if a company were to test a financial covenant, that would be a negative event for a bond, but it could actually be a positive event for the term loan. So our ability to flex between bonds and loans gives us the advantage of a broader opportunity set across which to express our views. This higher degree of investment freedom helps us build a better portfolio and create successful outcomes for clients.
Contact the Editorial Staff
Have a question or comment? We welcome your feedback. Comments will not be made public, but will be read by a member of our editorial staff.
Thank you for your question or comment.