portfolio by buying lower dollar-priced bonds . “ If you buy a bond at 80 cents , you ’ re baking in additional downside protection ,” McClain says .
He adds that lower dollar-priced bonds have been prevalent among longer-duration securities . Duration is a measure of a debt instrument ’ s sensitivity to changes in interest rates , so bonds with higher durations will be more affected by rising rates . That can result in lower prices , making them more attractive from a valuation perspective .
McClain says the fund had a reasonably short-duration portfolio going into 2022 , but the duration has risen as the managers have sought more downside protection by buying the lower dollarpriced bonds . The fund ’ s effective duration at the end of May was 3.84 years .
As Zox summarizes it , “ The direction we ’ ve been moving is up in quality , up in duration , down in dollar price .”
The fund ’ s recent top three sector weightings were in financial services , energy and retail . The vast majority of the holdings are in North America . Zox says the team is increasingly finding good value plays in the technology sector .
“ Some technology companies have such strong balance sheets and huge capitalizations relative to debt that [ their recent market declines are ] entirely an equity issue and not a bond issue ,” he notes . “ Yet the bonds have reacted to what ’ s happening with the equities . Maybe the market cap is cut to $ 60 billion from $ 120 billion , but if you have $ 3 billion in cash and $ 1 billion in debt , it ’ s not really an issue for the debt .”
The fund this year was down 11.4 % as of mid-June , trailing its Morningstar high-yield category average by 26 basis points . But it had outperformed the 12.2 % loss of its benchmark , the ICE BofA US High Yield Index . The fund recently sported a 30-day SEC yield of 7.01 %.
Long-Distance Relationship
McClain and Zox run the fund with assistance from research analyst Jack Parker . Until recently , the trio were employed by Columbus , Ohio-based DipoRtfoLio spotLight
amond Hill Capital Management Inc . In 2021 , Philadelphia-based Brandywine Global Investment Management LLC bought Diamond Hill ’ s high-yieldfocused U . S . corporate credit mutual funds . ( Brandywine Global was previously acquired by Franklin Templeton ’ s parent company , Franklin Resources Inc ., when it purchased Legg Mason Inc . and its affiliates in 2020 .)
McClain , Zox and Parker remain in Columbus . While they call the shots at the BrandywineGlobal High Yield Fund , Zox says they frequently interact with the credit analysts on Brandywine Global ’ s fixed-income team .
“ We value their global macro perspective , and especially at economic inflection points like we ’ re facing now , that global macro perspective is really helpful to us ,” Zox says .
Indeed , these are trying times for the financial markets , including the highyield bond segment . In a recent report , UBS senior fixed-income strategist Leslie Falconio said the combination of higher interest rates , slowing economic growth and continued inflationary pressures will likely affect the high-yield debt market . She noted the high-yield area is more economically sensitive and carries higher debt loads relative to earnings than the investment-grade group , and this could have a negative effect on the cash flows of lower-quality issuers within the high-yield market .
As McClain mentioned , he and Zox have pivoted away from the lower-quality regions and toward the higher-rated portion of the high-yield spectrum . He posits that high-yield companies on the whole had very good interest coverage coming into this year , meaning they can sufficiently service their debt because they borrowed money over the past 18 months at very low rates .
“ Leverage was fairly reasonable coming into the year ,” McClain says . “ These companies are in a position to where I think you ’ ll see a low default rate environment on a go-forward basis . So you ’ re getting compensated at a healthy rate relative to investment grade .” get more .
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