Thought Capital

Don’t Wait on Spread Widening

Yields are on sale, offering investors an attractive income-generating opportunity

Yield potential has doubled in the last two years across many sectors of the credit market, especially leveraged loans and high yield bonds. But, investors might be on watch, expecting spreads to widen amid concerns for slower economic growth. Fear not, while uncertain economic conditions come and go, the yield profile offered in today’s leveraged credit market, in our view, has rarely been more compelling.

Figure 1: Today's Yields vs. 20211

Fig 1

Data as of June 30, 2023.

With bonds trading at attractive prices relative to history, why wait on this income-generating opportunity? Investors are getting paid to participate in the leveraged credit markets right now, and we believe today’s already discounted prices provide a reasonable cushion against incremental spread widening, should it occur.

Figure 2: The Price of High Yield is Very Attractive2

Fig 2

Data as of June 30, 2023.


Our bottom-up, fundamental research process is designed to capture incremental yield without incurring undue risk. At Polen Capital, we do not chase yield by investing in distressed debt that needs a rosy economic outlook to recover. Rather, we invest for the long term and in the debt of good businesses that offer higher coupons relative to the market. Today, our research indicates much of that debt is on sale at discounted prices, offering yields rarely seen outside of recessions.

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Important Disclosures

1Direct Lending is represented by the Cliffwater Direct Lending Index. High Yield is represented by the ICE BofA U.S. High Yield Index. Leveraged loans are represented by the Credit Suisse Leveraged Loan Index. Emerging Markets is represented by the JP Morgan EMBI Global Index. Real estate is represented by the FTSE/NAREIT Equity REIT Index dividend yield. Investment Grade Bonds (IG Bonds) are represented by the Bloomberg U.S. Aggregate Bond Index. U.S. Treasurys are represented by the ICE BofA 10-Year U.S. Treasury Index. Past performance is not indicative of future results.

2 Source: Polen Capital. Data as of 6-20-2023. Chart refers to the bond prices in the secondary market for the representative account of the U.S. Opportunistic High Yield strategy. The representative account is an account within the Polen Credit U.S. Opportunistic High Yield Composite (“Opportunistic Composite”) that Polen has deemed the most representative of the accounts managed by Polen pursuing the Opportunistic Composite investment strategy. Contractual investment guidelines and length of track record are the most important factors in determining a representative account for the Opportunistic Composite strategy.

Past performance does not guarantee future results and profitable results cannot be guaranteed.

The information provided in this document should not be construed as a recommendation to purchase or sell any particular security.

Portfolio characteristics are shown as of stated date. There can be no guarantee that the portfolio will exhibit identical or similar characteristics to those shown at any future time of investment. Investments are subject to risks, including the possibility that the value of any investment (and income derived thereof (if any)) can increase, decrease or in some cases, be entirely lost and investors may not get back the amount originally invested. 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. The views and strategi es described may not be suitable for all clients.

The ICE BofA U.S. High Yield Index consists primarily of bonds and notes rated BB or lower. However, the benchmark is an unmanaged index and does not include any private (non-144A) obligations, convertible bonds, preferred and common equity, and certain other securities and obligations.

The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of USD institutional leveraged loans, including US and international borrowers.

The Cliffwater Direct Lending Index (“CDLI”) seeks to measure the unlevered, gross of fees performance of U.S. middle market corporate loans, as represented by the underlying assets of Business Development Companies (“BDCs”), including both exchange-traded and unlisted BDCs, subject to certain Eligibility Criteria. The CDLI is an asset-weighted index that is calculated on a quarterly basis using financial statements and other information contained in the U.S. Securities and Exchange Commission (“SEC”) filings of all eligible BDCs.

The J.P. Morgan ESG EMBI Global Diversified Index (JESG EMBIG) tracks liquid, US Dollar emerging market fixed and floating-rate debt instruments issued by sovereign and quasi-sovereign entities.

The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.

ICE BofA U.S. 10-15 Year Treasury Index – This index tracks the performance of U.S. dollar-denominated, 10- to 15-year sovereign debt publicly issued by the U.S. government in its domestic market.

The Bloomberg US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

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