Los Angeles-based L&S Advisors Inc.'s Short-Duration High-Yield strategy topped Morningstar's list with a gross 34.29% return for the year ended June 30. The strategy was in second place for the year ended March 31.
L&S takes a balance sheet-driven approach to managing the portfolio, speaking with the companies' management teams and selecting attractively priced high-yield issues from companies that show the potential for balance sheet improvement, said Matthew Nussbaum, a portfolio manager and senior analyst.
As an example of the firm's approach, Mr. Nussbaum said the portfolio held Antero Resources Corp., an oil and natural gas company, with high conviction after speaking with management and seeing the company's potential to execute a strategy that would provide free cash flow going forward and balance sheet improvement.
"We're not looking for troubled companies, to see that the bond is trading above recovery value and liquidation value. We're looking for consistently improving cash-flow ability, for the ability to cover interest. That gives us the comfort to say we're going to get paid on our investment and our clients are going to benefit from it," said Bennett Gross, president of L&S Advisors.
The concentrated portfolio holds 35-40 companies, with no single issue occupying more than 4% of the portfolio.
For the year ended June 30, Kenneth Malamed, a senior managing director at L&S, said "We were buying good companies with long histories that were trading at stress levels, which is what allowed us to produce a 30-plus percent rate of return in a bond portfolio, something that doesn't happen very often."
Mr. Malamed said the portfolio managers found companies with the potential for improvement across multiple sectors, from Antero in energy, to names in retail and the industrial sector. He said the common themes the portfolio managers look for are management's willingness to speak candidly and manage through disruptions.
"So far in 2021, we're having a very good year, well above the benchmarks. We expect the year will continue that way because these opportunities continue to exist and companies are finding opportunities to improve their balance sheets with the tremendous amount of liquidity available in the economy. Is it a straight line? Absolutely not. But we are confident in what we own," Mr. Malamed said.
Looking forward, he said the portfolio's managers expect to find continued opportunities in the short-duration high-yield market, which provides higher-than-average rates of return with less-than-average risk.
The short-duration portfolio is limited to a maximum five-year maturity, on a rolling basis.
L&S Advisors' High-Yield strategy, which is managed by the same team, was in fifth place on Morningstar's list with a gross 24.35% return for the year. The High-Yield strategy has a maximum maturity of 10 years, on a rolling basis.
Miami Beach, Fla.-based Thomas J. Herzfeld Advisors Inc.'s Fixed-Income composite was in second place on the one-year list, with a gross 31.27% return and topped the five-year list with a gross annualized 11.28% return for the period ended June 30. The strategy, which is in Morningstar's multisector bond category, was in fourth place on both the one- and five-year lists for the period ended March 31.
Erik Herzfeld, president and portfolio manager, said the portfolio has remained nimble, maintaining its high-yield stance during the quarter ended June 30, while benefiting from short Treasury positions, such as trading 10-year Treasuries in the 120- to 125-basis-point range.
"Whenever we get a bond rally, we take some profit. And when there's a sell-off, we add exposure. So, lots of trading opportunities. I think that's helped our performance," he said.
The portfolio's view is not typically driven by macroeconomic indicators, Mr. Herzfeld said, but with recent reports showing market liquidity at its lowest point since March 2020 and August 2021's upcoming Economic Policy Symposium, hosted by the Federal Reserve Bank of Kansas City, Mo., Mr. Herzfeld sees the possibility of rate changes that could bring a different set of opportunities later in the year.
"I just think that the market has gotten complacent. You can't run a -3.5% real rate forever, so I think that at some point you're going to have to see some yield. We're keeping our duration quite limited, quite short," he said.
Managers are also keeping the portfolio liquid, "the highest it's been for about three or four years," to remain flexible for upcoming opportunities and potential rate changes, Mr. Herzfeld said.
Flexibility over the long term is important to the portfolio's managers as well. In looking at the portfolio's five-year performance, Mr. Herzfeld said, "We spend a lot of time looking in places that others don't. We try to be nimble. We try to keep our book flexible. If we change our mind on something, we try to reflect it. We don't get married to a particular view."
Third on the one-year list was First Trust Portfolios LP's Taxable Closed-End fund, with a gross 29.5% return for the year. A 27.17% gross return for fourth-place ranked Mesirow Financial's High-Yield strategy rounded out the top-5 list for the one-year period.