By Bob Child, President
Veteran bond investor, Bob Child describes his strategy of buying debt of “junk” rated companies and holding out for profits. With almost fifty years in the industry, few can match Mr. Child’s depth of knowledge.
Child’s strategy of purchasing out-of-favor securities that pay high-yield returns focuses on bonds that he believes to be undervalued and have the potential for improvement in their credit ratings. Focusing primarily on the upper tier of BB or B rated bonds, also known as junk bonds, Child believes these investments have gotten a “bad reputation,” so to speak. Many investors view these bonds as risky and speculative, but the long-term data may suggest otherwise (1). According to a leading independent research provider, CreditSights, over the last, 3, 5, and 10 years, the high yield bond market posted the highest total return compared to the major asset classes, including treasuries, high grade corporates and leveraged loans (2). Good companies run into financial difficulties at one point or another. As a result, these company’s credit ratings may be downgraded by a debt rating service such as Moody's or Standard & Poors. “Even some Fortune 500 companies are rated below investment grade, these are the companies that I purchase for myself and my clients when suitable” says Child. When asked about the recent credit rating downgrades on 15 of the world’s largest banks by Moody’s Investors Service recently, Child feels that “Moody’s downgrade is another overhyped story. The corporate market thinks for itself and credit rating agencies are often lagging indicators.”
With a strict discipline in place, Child watches the bonds within his portfolios daily, adjusting his analysis, based on the current market environment and what he believes the future may bring. Once the underlying financials of an individual bond improves, or should the market perception change from negative, depending on the purchase price, to positive, the high-yield bond price may increase, resulting in capital appreciation. Child moderates risk by researching and understanding the company’s financials and bottom lines, as well as diversifying the portfolio into different issuers, hunting for values within the domestic and international, high yield corporate bond market.
Realizing the opportunity in the bond market 40 years ago, Child began investing in the municipal bond area and gradually moved toward purchasing company debt thru high-yield corporate bonds. “There is risk in every investment, however, with higher yielding corporate bonds you may also collect a coupon that will help cushion you from rate volatility. In a rising-rate environment, when that day does come, high-yield may be less exposed," says Child. “Generally, high-yield bonds tend to produce attractive returns when the economy is growing, similar to the stock market,” says Child, “and, with interest rates at an all-time low, investors, specifically retirees, are hungry for better returns on their conservative investments.”
(2) CreditSights – US Morning Comment. (6/22/12). Global Asset Class Returns.
Disclosure: Securities offered through vFinance Investments, Inc., Member FINRA/SIPC. Child Group Wealth Management advisors are registered with National Asset Management, Inc., a SEC Registered Investment Advisor and affiliate of vFinance Investments, Inc., Accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments company. National Asset Management and vFinance Investments are not affiliated with the Child Group Wealth Management.
Disclaimer: There are risks involved with investing, including loss of principal. Past performance does not guarantee future results. By investing in bonds you may be subjected to price volatility based on fluctuations in issuer and credit quality. When investing in bonds, you are subject, but not limited to, the interest rate, inflation and credit risks associated with the bonds. Bonds may be worth less than original cost upon redemption or maturity. ** Fixed Income investments may limit a client’s risk exposure by receiving consistent cash flow on their investment depending on the terms and rating of the investment, no matter what the market value of the bond is at that time. So, even thru volatile times, as we have seen these past few years, while the principal value of bonds will fluctuate with the markets, most bond investments are locked in at a fixed interest rate of return.
* Interest payments are determined by the interest paying ability of the underlying guarantor. Principal for fixed income products are generally paid upon maturity date unless called prior to maturity by the underlying guarantor. Investments in Fixed Income products may lose principal value if sold prior to maturity. ** Please discuss your specific investment objectives, time horizon and risk tolerance with your investment professional prior to investing.
National Asset Management, Inc. ("NAM") is a registered investment advisor with the Securities and Exchange Commission. NAM provides fundamental investment management services to investors. The views expressed contain certain forward looking statements. NAM believes these forward looking statements to be reasonable, although they are forecasts and actual results may be meaningfully different. Actual events may cause adjustments in portfolio management strategies from those currently expected to be employed. This material represents an assessment of the market at a particular time and is not a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any security in particular. No representation is being made that any investor will or is likely to achieve profits or losses.
Diversification: Diversification does not guarantee against loss. It is a method used to help manage investment risk.