How Lord Abbett Invests in High Yield
Performance By Design: How Lord Abbett Invests in High Yield
Steven F. Rocco, CFA
Partner & Director of Taxable Fixed Income
Andrew H. O'Brien, CFA
Partner & Portfolio Manager
We've been investing in high yield at Lord Abbett for over 20 years. And we have a lot of experience in the market.
So, the search for value in the high yield market starts from the top down.
We'll take a look from a big picture perspective and try and find which industries seem to be undervalued, or which industries have potential catalysts that will help them outperform in the coming weeks, months, and quarters.
Then our analysts will go through in those particular industries and identify companies from the bottom up that fit the themes that we think are likely to be beneficial.
And this combination of starting from the top down but then doing rigorous bottom-up work to find companies that fit within the themes you've identified is how we find value in the high yield market.
Yeah, that's a good point, Andy. It's very important in high yield to understand the macro conditions, the macro economies that could, you know, help drive returns, you know, for particular business, a particular sector--given the leverage that you're dealing with in some of these capital structures.
So the macro- is always our first starting point, and then the analysts can kind of come in and look at the fundamentals and help pick the securities that fit our macro themes.
TOOLS OF THE TRADE
At Lord Abbett, we've spent many years developing a suite of risk management tools that we use in our portfolios. We have tools that help us our manage our duration appropriately. We have tools that help us manage our position sizing for securities. We have tools that help us understand our overall spread duration in the portfolio, what we call a quality adjusted spread duration.
And one of the main risk management tools available to us is diversification. So making sure that the portfolio is not exposed to undue losses from any one particular event.
So we have quantitative tools that determine what we think sectors are rich or cheap and we can use those tools to help allocate within a sector. So let's say that we think, you know, energy, you know, based on a longtime history is cheap versus industrials or financials. We can sell financials and buy and buy energy using our quantitative tools.
THE COLLABORATIVE APPROACH
Steve and I work together in both a structured and an unstructured way. In the structured sense, we have formal meetings where we meet regularly to discuss what's going on in the markets, what's going on in the portfolios, and what we should be doing. But I think more importantly it's the informal, or the unstructured collaboration. Our offices are set up so we're physically next to each other and we're not in an office with four walls.
So we can hear each other-- having conversations with analysts and traders. We know what we're up to at all times and we can easily reach out, and talk to each other, and say, "What do you think about this piece of news? Did you see this investment opportunity, what do you think of it? What do you think the right response is to this situation?"
Yeah, there are no silos at Lord Abbett. Everyone comes together and tries to reach the best decision. Andy and I have spent a lot of time over 15 years of working together on many different products, so we have a good level of understanding, communication, and we know how to engage with each other and use the others around us to reach that best investment decision for our clients.
For additional perspectives from Lord Abbett investment professionals, visit lordabbett.com
A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Lower-rated bonds may be subject to greater risk than higher-rated bonds. No investing strategy can overcome all market volatility or guarantee future results.
Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee. /p>
Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.
This video may contain assumptions that are âforward-looking statements,â which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
A bond yield is the amount of return an investor will realize on a bond. Though several types of bond yields can be calculated, nominal yield is the most common. This is calculated by dividing the amount of interest paid by the face value.
Duration is the change in the value of a fixed-income security that will result from a 1% change in market interest rates. Generally, the larger a portfolioâs duration, the greater the interest-rate risk or reward for underlying bond prices.
The Sharpe ratio compares an investment's excess returns (above the risk-free rate) to the volatility of its return. The higher the Sharpe ratio, the greater the compensation per unit of risk.
The credit quality of the securities in a portfolio is assigned by a nationally recognized statistical rating organization (NRSRO) such as Standard & Poor's, Moody's, or Fitch, as an indication of an issuerâs creditworthiness. Ratings range from AAA" (highest) to "D" (lowest). Bonds rated âBBBâ or above are considered investment grade. Credit ratings "BB" and below are lower-rated securities. High yielding, non-investment-grade bonds involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer's ability to pay interest and principal on these securities.
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