Corporate Credit

Objective

Our objective is to generate high current income with the opportunity for capital appreciation. We expect to achieve our objective by investing in corporate bonds when we believe the market price discounts a greater risk of default or a greater loss upon default than is warranted.

Investible Universe

The strategy invests in both investment grade and below-investment-grade corporate bonds, with a bias to defensive high yield corporate bonds (due to lower duration and/or higher credit quality). Under normal circumstances, the strategy will have an effective duration of less than five years. Our primary focus is valuing the underlying business and evaluating the associated credit risk, rather than interest rate risk.

Investment Process Summary

Research Process Focused on Fundamental Credit Analysis

Our company analysis focuses on the fundamental economic drivers of the business and assesses whether there is adequate financial strength and flexibility to meet ongoing commitments. Avoiding deteriorating situations is critical to delivering consistent results in corporate bonds. We evaluate not only the business prospects of the issuer but also whether the current price is attractive relative to risk.

In analyzing the underlying risk/return relationship, we look at the individual bond characteristics such as coupon, tenor, covenants, call schedule, bond rating, and size, which all factor into the price we are willing to pay. We will look to take a position in a security once we believe that we have sufficient downside protection and it is priced attractively. We seek to invest in businesses with improving return on invested capital, stable or improving competitive advantages, manageable balance sheets, and outstanding managers and employees.

We also evaluate management’s treatment of bondholders and stockholders. We believe management teams that understand the competitive dynamics of their business and employ prudent capital allocation often produce value for bondholders and stockholders.

Security Selection on Strong Theses

After the credit research is complete, the portfolio managers determine whether a security is attractive relative to asset and interest coverage and relative to other securities with comparable risk. We will only own the bonds of a company that we can analyze and value.

Portfolio Construction

Portfolio construction is a bottom-up process. The portfolio managers typically assign the highest weights to companies where they have the highest conviction. Our familiarity with a company, degree of downside protection, the attractiveness of the price, and analyst conviction shape our portfolio construction. The liquidity and expected volatility of a corporate bond are also important factors in portfolio construction. Because of our long-term time horizon, we will invest in less liquid or more volatile securities when we receive compensation that exceeds what we deem necessary.

Opportunities may arise out of company-specific dislocations, industry dislocations, or market-wide dislocations. The important point is that we have conviction in our analysis, and we are willing to take advantage of dislocations that result in mispriced bonds.