Gary Russell has led this strategy since August 2006 and previously ran DWS’ high-yield team in Europe. Thomas Bouchard and Lonnie Fox have comanaged the strategy since 2016 and 2018, respectively, after joining as credit analysts in 2006 and 2008. The trio is supported by European counterpart Per Wehrmann and 14 analysts split between the United States and Europe. The support team is sizable, but with 19 departures since 2016, turnover has been an issue.
The managers leverage the firm’s macro-outlook to shape risk budgeting and industry allocation. Analysts assign a recovery value and probability of default to each bond and loan and look at standard fundamental metrics to assess attractiveness relative to the constituents of the strategy’s BofAML Non-Financial Developed Markets High Yield Index benchmark. High-conviction names are typically sized up to 3%, while names perceived as riskier are scaled down accordingly.
The strategy’s higher-quality and global approach sets it apart from peers. The allocation to riskier bonds rated CCC and below stood at 5% as of March 31, 2021, well under the high-yield bond Morningstar Category’s 13% median. The managers pursue opportunities across the globe, and while allocation to the U.S. represents the bulk of assets (60% as of March 31), the portfolio includes sizable exposures to Europe (19%) and Canada (7%). Low-single-digit stakes in emerging markets round out the portfolio.
Over Russell’s tenure from Aug. 1, 2006, through April 31, 2021, the 6.5% annualized gain of the strategy’s institutional share class slightly edged out the category median (comparing distinct funds) peer, landing it in the top half of the category, while the strategy’s volatility-adjusted performance beat over two thirds of rivals.
The Bond Fund’s Approach
The strategy’s disciplined and conservative credit-driven process has demonstrated its value through time, but the analyst churn casts a shadow on its execution and puts a lid on our confidence level, supporting an Average Process Pillar rating. The team takes a conservative and straightforward approach to credit investing. Lead manager Gary Russell and six other high-yield managers focus on portfolio construction, translating the firm’s macro view into investment decisions. Analysts assign each company a recovery value and probability of default, which helps the managers appropriately size positions. All positions are typically capped at 3% and riskier names are scaled down, resulting in a portfolio that usually counts over 350 holdings, ensuring proper diversification, especially on the portfolio’s riskier sleeves.
The strategy’s global mandate has historically resulted in about 60% of assets invested in U.S. high-yield bonds, with most of the balance split between Canadian and European issues, but non-U.S. currency exposure is hedged back to the U.S. dollar. In terms of credit profile, the portfolio tends to skew higher-quality than its high-yield bond category peers, with a relatively large BB stake and limited allocations to issues rated CCC or below.
The Bond Fund’s Portfolio
The team has expressed its conservatism by favouring higher-quality segments of the high-yield market. For example, issues rated BB represented 57% of this strategy’s portfolio as of March 31, 2021, versus 41% for its typical high-yield bond category peer. On the other hand, issues rated CCC and below totalled just 5% of assets or 8 percentage points less than the strategy’s typical peer. The strategy uses its global team to offer a distinct geographic footprint that separates it from many of its peers. Indeed, its non-U.S. exposure stood at 30% as of March 2021, or almost 3 times its typical peer’s. Developed European corporates accounted for 19% of assets and Canadian positions for 7%. Smaller allocations to Asia, Latin America, Africa, and the Middle East stood in the low single digits.
The strategy has had a sluggish start to 2021 owing to its higher-quality tilt and minimal use of bank loans. Rising rates for much of 2021 has prompted many peers to favour higher-yielding and lower-quality assets and bank loans to offset this. As of March 2021, the 41% in B and below was on the aggressive end for this strategy, but its typical peer had over 50% here, including 13% in CCC and below. At the same time, the strategy held less than 1% in bank loans, while a fifth of its peers held about 10% here.
The Bond Fund’s Performance
| Owing to its conservative credit profile and good security selection, this strategy has produced solid returns under lead manager Gary Russell’s watch. Since Russell took over in August 2006 through April 2021, its institutional shares returned 6.5% annualized, landing it in the top half of its high-yield bond category peers. Impressively, the team was able to keep volatility at bay for most of this period, and the strategy’s volatility-adjusted performance–as measured by Sharpe ratio–beat 66% of rivals. During the energy-led credit sell-off from June 2015 to February 2016, a lower exposure to bonds rated CCC or below helped the strategy hold up better than most rivals. Over the period, its 5.9% loss outperformed the category median by 2.3 percentage points, landing ahead of 70% of its distinct peers.
Source: Morningstar
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