Where are the opportunities in high yield investing? An interview with Paul Matlack, CFAJanuary 30th, 2013 by Marc Prosser
Paul Matlack is a portfolio manager for Delaware High-Yield Opportunities Fund (DHOIX), one the strongest-performing high yield mutual funds over the last 10 years. While Paul only recently became a portfolio manager on the Fund, he has been helping guide fixed income strategies at Delaware for more than 13 years and has managed high yield bonds for 21 years. We wanted to get his thoughts on where he saw opportunities in the high yield market.
Learn Bonds: The Fund is heavily invested in foreign bonds. Can you tell me why?
Paul Matlack: A little less than 20% of the Fund is invested in foreign bonds, mainly in Europe. The bonds pay in US dollars. In our view, these bonds yield about 80 bps (0.8%) more than similar bonds from a US company, representing good relative value. European companies tend to be more financially conservative than their US counterparts. We have been able to find high yield bonds from good companies with good financials, that are being penalized for poor operating metrics (sales, profits) due to the sluggish European economy.
LB: Are European bond issuers having trouble raising money?
Paul Matlack: European companies tend to have much closer relationships with their banks than US companies. In many cases, the banks own pieces of the companies. As a result, companies tend not to be cut off from financing in the same rapid fashion that can occur in the United States.
LB: What’s your view of the US High Yield Market?
Paul Matlack: We believe there is opportunity for yields to come down relative to Treasuries by about 100 bps (1%). High yield bonds provide about 550 bps (5.5%) more interest than comparable Treasuries, which is right in line with historical averages. In 1996 / 1997, the spread went as low as 250 bps, so there is room for spreads to compress. However, the combination of low Treasury yields and the high dollar price of the bonds makes a drop of more than 100 bps very difficult.
LB: Does the extra yield provide adequate compensation for the risk of default?
Paul Matlack: Default rates are running around 2%, an all-time low. We believe that default rates will continue to remain low. There are two main reasons why companies default: they aren’t fundamentally profitable companies, or they are unable to handle their debt load. Companies have done a great job pushing out the maturities on their debt to 2016 and beyond. Very few companies are going to be under extreme refinancing pressure for the next few years. In terms of profitability, companies all over the credit spectrum have been hitting record profits.
LB: Why is average duration on Delaware High Yield Opportunities Fund so short?
Paul Matlack: The average duration of the Fund is about 3.6 years, which is only a little shorter than the Fund’s benchmark index. After 2008, corporate issuers were compelled by the market to issue bonds with 8-year maturities instead of 10 years. These bonds are typically callable after 4 years.