Penn Capital Management is stepping up its marketing efforts to prove its assets aren't junk.
The Cherry Hill, N.J., firm, which specializes in managing high-yield bond portfolios, is trying to expand its reach beyond wealthy individuals to bring in more institutional assets.
There is potential in the institutional marketplace, but it is a hard sale, said Christian M. Noyes, assistant vice president. He joined the firm last year, seeking to focus on developing institutional business.
"We feel high yield is right on the cusp," said Mr. Noyes. Sponsors "are starting to realize it is a viable asset class."
High-yield bonds are starting to shake off the stigma of the 1980s' junk bond meltdown, but institutional investors still need to be convinced, he said. He noted an SEI Corp. study found only 6% of defined benefit plans have a high-yield component, and those plans are mainly corporate funds and foundations.
Mr. Noyes said he has been concentrating on marketing to consultants and corporate funds, reasoning that companies that issue high-yield debt are more likely to understand its value as an investment vehicle. While public funds have been slow to come into the asset class, Taft-Hartley funds have no participation in the high-yield markets, he said. That is ironic, said Mr. Noyes, because the manufacturing companies that traditionally employ union labor also are traditional issuers of high-yield debt.
Penn Capital has $250 million in assets: $120 million is in two high-yield strategies, $100 million in Treasuries and $30 million in equities it manages for existing clients. Nearly half of its assets - and the lion's share of the high-yield assets - come from wealthy individuals.
The firm was started in 1987 by Richard Hocker and Kathleen News, formerly high-yield managers from Delaware Investment Advisors. After the 1989-'90 collapse of the junk bond market, Penn Capital had been building a five-year performance track record it could present to sponsors, said Mr. Noyes. For the five years ending Dec. 31, 1994, the firm's active high-yield strategy showed a 19.94% return, compared with 12.94% for the Merrill Lynch High Yield Index.
Penn has a defensive high-yield strategy, which takes small positions in debt rated in the highest tiers below investment grade, B and BB. But the active high-yield strategy is the firm's main product, said Mr. Noyes.
In the active strategy, 50% of the portfolio is made up of a core of defensive positions and the other 50% rotates among holdings looking for undervalued debt, much in the way equity managers look for value stocks.
For example, Mr. Noyes noted Penn Capital did very well with buying several casino holdings last year, when it appeared Philadelphia would approve gambling. Atlantic City casino debt was beaten down by the drop in revenues expected from the competition, but Penn Capital analysts reasoned Philadelphia gaming was years away; after they bought in, the Atlantic City casinos had a great fourth quarter, and the firm has since rotated out of those holdings.
Penn Capital plans to cap the active strategy at $700 million, from the $70 million it has now, to keep from becoming too large to be effective. High yield is a small market, and large investment companies can only be defensive in their strategies, said Mr. Noyes. They need large positions to make a difference in their portfolios, so they can't pick and choose undervalued securities as well as a small manager, he said.
