The volatility currently roiling the U.S. high yield market hasn’t changed our view on credit; but it does reinforce the notion that active management is key for investors who have the flexibility to look for winners and avoid losers in this corner of the bond market. In fact, we see any “distressed selling” as a potential entry point, particularly for those, like us, who have kept some powder dry knowing that today’s low-rate environment has given rise to frequent bouts of volatility.
Here are three points that are top of mind in our own high-yield strategies:
- Remain patient and add positions selectively, particularly in credits with solid fundamentals that are being unduly pressured by near-term market volatility.
- Favor domestic U.S. sectors (housing & housing-related sectors, banks/financials, consumer-related industries, healthcare/pharma, etc.) where demand is healthy.
- Remain cautious on many commodity-related areas.
We believe that the U.S. economic expansion still has legs, even after six years of growth. The consumer, which represents just under 70% of the economy, is healthy and the banking sector has built up a significant capital cushion over the last six years to weather periods of stress. This environment should help keep default rates low, especially for sectors outside of energy and metals and mining.
At PIMCO, we’ve maintained a higher-quality bias in our high-yield portfolios with an emphasis on avoiding lower quality, commodity-related and illiquid securities which have been a challenge for others. This quality bias and rigorous focus on liquidity as part of our active management of portfolios has led us to hold more cash and focus on liquidity positions to capitalize on market dislocations and has driven the firm’s performance.
The ride may be bumpy, but we believe investors with active, long-term managers will be less likely to get derailed.