Podcast: Money Tree Investing Digs into High Yield Markets

Dave Breazzano talks why the perceived risk of credit default is higher when investing in high yield bonds & loans, but the reward can be too

The head of Polen's High Yield team, Dave Breazzano, sat down with the Money Tree Investing podcast to discuss investing in high yield bonds and loans, the economy, and why the time is now to look at high yield debt.

Podcast Highlights

  • Dave has been investing in the high yield market since the 80’s and mentions that the current macroenvironment differs from that of the past in part due to rising interest rates. After a 40-year trend of declining rates, most investment professionals are facing a dynamic they have never experienced.
  • With the continuous decline in rates, investors were not making money and locking in a real loss for owning fixed income. That's not healthy, according to Dave. Today, he says we are seeing the consequences of that environment with the demise of certain banks.
  • He suggests we are now in an era of more appropriate rate levels where bond and loan investors can earn a return for investing in fixed income.
  • With investing in high yield bonds and loans, the perceived risk of credit default is higher, where a company may not pay on time or go bankrupt. In return for that risk, there's a higher reward or a higher yield. Dave says, “For investors like us, we can participate in that part of the market to try to find those gems that provide this high yield, and the company never defaults.”
  • He and the Polen High Yield Team deeply analyze each individual company on its own merits and how it will perform based on their view of the future economy and take a targeted approach to selecting their investments.
  • Dave also notes that, by historical standards, default rates are very low, trending around 1% or lower. Default rates typically average 3-4%.
  • People often overlook the recovery rate, according to Dave. When a bond or loan defaults, it rarely goes to zero. Historically, the recovery rate has been around 41 cents on the dollar. Dave says, “We can enhance the recovery rate to get back more than 41 cents on the dollar. The correct math considers the default rate and recovery rate when computing the loss rate.”
  • Dave closes by saying, “Bonds have been volatile of late, but over time, they're less volatile than equities. So, you get a high yield. In some cases, you can achieve double-digit yields, over 10%, with some amount of price stability because they're bonds not stocks. A couple years ago, with a 4% or 3% interest rate environment, you couldn't make much money in fixed income. Now, you can.”

Listen to the full Money Tree Investing Podcast here

We like volatility because it creates opportunity. People get scared, and they start selling everything, good and bad, at the same price.

Dave Breazzano
Head of Team & Portfolio Manager, U.S. High Yield

Important Disclosures

Please note that this document is a condensed summary of the full interview conducted by Money Tree Investing. 

This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of May 2023 and may involve a number of assumptions and estimates which are not guaranteed and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction. Past performance does not guarantee future results and profitable results cannot be guaranteed.

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