When selecting bonds for the Fund portfolio, our focus is on companies that we deem to be moderate-risk issuers, which may represent 30% to 75% of the portfolio. To balance out the moderate-risk core, we may invest 20% to 50% of the portfolio in more conservative holdings offering steady coupon income, and as much as 20% of the portfolio in aggressive issues. Our goal is to enhance total return, while preserving capital and minimizing volatility.
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Our efforts to develop a thorough knowledge of high yield corporate bond issuers is a critical aspect of our investing process, which is based on intensive research. We review financial reports, corporate developments, trading activity, and we conduct hundreds of annual face-to-face visits with corporate management to gain insight into trends affecting their financial development and factors guiding their capital allocation decisions. We talk to retailers, distributors, competitors, and consumers, visit corporate properties and attend industry trade events. The data we gather is crucial to our analysis and is used in detailed financial models, a range of best-to-worst case scenarios and probability analysis.
The companies we look for are leaders in industries that have historically been able to support leverage, and are run by fiscally responsible management teams who use leverage prudently. When we select bonds, we favor those issued by asset-rich companies in relatively stable sectors, with predictable revenue growth, positive free cash flow, and a debt amortization schedule that, over time, will enhance the balance sheet.
Once we own a bond, our research continues. Results either confirm the opportunity, or reveal a reason to sell. Our focus is continually on minimizing credit risk, and we utilize an array of risk control measures. We continually monitor cycles and trends in the market and the economy, the yield differential, or spread, between various fixed income instruments, default rates on corporate bonds and returns in the high yield bond market, as we search for opportunities to generate portfolio returns and minimize volatility. |
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