INVESTMENT PROCESS & STRUCTURE
Marret’s investment process is a blend of top down and bottom up strategies. It begins with a macro forecast and selection of industry over and underweights, then moves into company and individual security selection.
Once attractive sectors are identified, bottom-up analysis is utilized to identify securities within these industry groups and isolate positive opportunities.
Review company fundamentals to assess their ability to generate cash to meet interest and principal obligations.
• Industry position
• Operating leverage
• Management strength/experience
• Analyze historical earnings and stress test future projections
• Assess company’s liquidity profile
• Review company ratios and accounting practices
• Track stock prices as a leading indicator of changing credit fundamentals
The ultimate goal of the process is to identify securities whose trading levels are inconsistent with our analysis of potential return and underlying risk.
Portfolio Structure Key Elements
• Diversify industry exposure
• Limit exposure to any one issue
• Invest across a broad spectrum of maturities
• Identify special situations that reduce risk yet offer acceptable returns
• Avoid interest rate speculation
• Select issues with a good call protection and security backing
• Minimize default risk through ongoing analysis based on industry and company fundamentals
• Assess each security’s liquidity characteristics and diversify between levels
There are a few trading rules that we have found useful and generally have come to regret, when for whatever reason, we have not followed them. You will note this part of our process is heavily weighted toward avoiding market downturns and not how to catch the rallies. This is because the market always provides an attractive absolute yield. The key to out-performance is not in catching rallies, but rather in avoiding defaults and retaining as much of the beginning yield as possible.
1. Always designate bonds purchased as either a core holding or a trade. If it is a trade, put either a price or spread target on it and also a stop loss. If either is reached - sell! Do not allow trades which do not work out to become core holdings. Take your medicine and drive on.
2. Carefully evaluate research which is contrary to your opinion. Talk to the analyst, not with the objective of voicing your opinion, but to gather information. Avoid reading only positive research on your companies.
3. You can never know too much about a company. Establishing good relations with management may provide some bias, but the portfolio team that knows the company best should have the best chance of outperforming.
4. Beware of fallen angels. Management is usually inexperienced in managing a leveraged balance sheet and the covenant packages inherent in the security reflect the investment grade status at the time of issue. The covenants therefore fail to provide the restrictions that are important to high yield investors.
5. Finally, always, always remember that high yield has essentially traded at a spread range of 275 to 1100 basis points over the past 30 years, with a mean spread of approximately 450 basis points (this will probably rise over the next few years as government debt is retired). When the spread is below 400, generally the next surprise will not be positive!
Upgrade credit quality!! Don't reach for yield!!!