Interview 017_Carl “Pepper” Whitbeck
Mar 25, 2014
byInvestment in Japan
Company: AXA Investment Managers
Lead Portfolio Manager / AXA IM FIIS US Short Duration High Yield fund Head of US High Yield, Portfolio Manager / Analyst 13 years of industry experience Carl is the Head of US High Yield and a portfolio manager/analyst with AXA IM. Prior to joining AXA IM in 2002, Carl was an analyst in the investment banking division of Lehman Brothers, where he performed financial analysis on companies in the consumer and retail sectors, and worked on a variety of M&A and high yield transactions. Since joining AXA IM, he has served in various capacities within the US High Yield team, including head of research, portfolio manager for US High Yield portfolios and co-portfolio manager for multiple Global High Yield funds. Carl received his undergraduate degree from Williams College and has the CFA professional designation.
Q1.Please describe your investment philosophy and how you invest
The goal of our investment process is to identify inefficiently priced income streams across the full ratings and maturity spectrum in the high yield market. To take advantage of these inefficiencies we must fully understand the risks associated with a particular investment so that we can calibrate the appropriate amount of income required to fully compensate for the level of risk taken.
Our investment philosophy states that the key to providing superior long term returns in the US corporate credit market is to focus on compounding current income and avoiding principal losses through fundamental credit analysis that focuses on companies which have improving credit trends. Our philosophy is a recognition and understanding that we are investing in a portfolio of bonds, and, based on the long-term history of the market, returns been primarily generated by the compounding of coupon income, rather than price appreciation of bonds.
This investment philosophy is supported by the return history of the high yield market. In dissecting the long-term returns of the high yield market into what has been earned through interest income versus price appreciation, it is clear that it is the high income stream that drives returns over the long run.
Q2. Describe today’s current investment opportunities. Why US High-Yield?
Fundamentals in the US high yield market remain strong and default rate are forecast to remain at or near historical lows. However, we do not expect to see much additional spread tightening, as from a valuation perspective, high yield is fairly priced. There continues to be aggressive issuance in the new-issue market and most of these new issues tend to trade up in the secondary market. From a liquidity perspective, it remains easier to be a seller than a buyer in today’s high yield market.
While the market remains concerned as to US treasury rates, it is our general view that any near term rate increases in the US will be relatively benign. We project a slow rise in interest rates due to the reduction in Fed’s asset purchases that have already been announced, as well as expectations for additional reductions that will be announced throughout 2014. Even in periods of dramatic rising rates, the high yield asset class has outperformed other fixed income asset classes (such as investment grade). Because interest rates and spreads are generally negatively correlated, there is some absorption of the rate increase as spreads compress.
Even without substantial spread compression, high yield bonds should still outperform other fixed income sectors, particularly in a rising interest rate environment. From a relative value standpoint, US high yield remains attractive, currently offering a YTW of 5.2% with a DTW of only 3.6, versus that of 10-year Treasuries yielding 2.7% at a duration well over twice that of US high yield. In summary, while 2014 may not bring the double digit returns of recent years, high yield investors should still expect healthy total returns.
Q3. What do you see as the biggest risk(s) in high yield strategy in today’s environment? Please elaborate.
The biggest risk in today’s US high yield market is that if the US Federal Reserve while in the process of reducing the amount of extraordinary liquidity and initiating heightened forward guidance on the direction of rates somehow loses the confidence of investors, a risk-off attitude may very well prevail for a period.
Q4. What is your ultimate investment belief? What do you try to achieve and what would you never do?
We believe that an active bottom-up investment process will produce superior investment results over time. The goal of our investment process is to identify inefficiently priced income streams across the full ratings and maturity spectrum in the high yield market. To take advantage of these inefficiencies we must fully understand the risks associated with a particular investment so that we can calibrate the appropriate amount of income required to fully compensate for the level of risk taken.
Q5. How best would you protect clients’ assets?
Our investment philosophy is based on the protection of our clients’ asset, as we believe the key to superior long-term returns is the compounding of income and protection of principal. We avoid principal losses through a blend of bottom-up analysis with a strong top-down component, allowing us to recognize macroeconomic market shifts. After screening for fundamentally sound companies with improving credit trends, our detailed fundamental analysis focuses on three major components: Assessing, Valuing and Managing risk. Segmenting duration risk via barbell positioning adds further value.
Our proven investment process is robust, disciplined and repeatable, with a decision-making process characterized by “debated consensus”, ensuring traders, analysts, portfolio managers and strategist share accountability for performance.
Q6. Please recommend your favorite books on investments, and the reasons you favor them.
Misunderstanding Financial Crisis, Why We Don’t See Them Coming by Gary B Gorton.
An interesting and informative take on the complexities of the US financial system and the short-comings of macro-economic models.
Predictably Irrational, The Hidden Forces That Shape Our Decisions by Dan Ariely.
When it comes to making decisions in our lives, we think we’re making smart, rational choices. But are we?
Fooled by Randomness, The Hidden Role of Chance in Life and in the Markets by Nassim Taleb.
What you think is the result of diligent work and reasoned thought and known occurrences may be nothing more than a random event.
Q7. Please recommend any media source (newspaper, journals and website) you check on a regular basis.
US financial market news is routinely delivered by a number of sources such as The Wall Street Journal, The Financial Times, Bloomberg News and Reuters. For those more disposed to search for economic data, all of the Federal Reserve’s District Banks maintain very extensive information on their websites. Lastly, if your tastes are less main stream and more “the other side of the story” ZeroHedge.com offers an interesting assortment of opinions and theories.
This article originally appeared on March 18, 2014. Any views presented in this article are as of such date and are subject to change.
This article and the information provided therein are not a recommendation to purchase or sell any security, nor are they intended to constitute the marketing of, or a solicitation for investment in, any investment product.