Polen Capital Management boasted the fourth- and fifth-ranked strategies for the year ended Dec. 31. Its U.S. high-yield composite strategy and bank loan composite strategy posted gross returns of 16% and 15.92%, respectively, for the period.
David Breazzano, head of team for credit and co-portfolio manager of the U.S. high-yield strategy at Polen Capital Management, said in an interview that Polen's entire credit effort is to "seek returns for our clients over the long run by constructing portfolios that have a yield advantage over the market and capture that yield advantage without increasing the overall credit risk of our portfolio."
Breazzano said that probably added about 100 basis points to his portfolio's outperformance and the balance of the outperformance was from security or credit selection. Also helping matters was a historically low level of defaults.
Breazzano also cited the advantages of fallen angels for the strategy.
"There were a number of fallen angels that came into the high-yield market during COVID, where they got downgraded from BBB into likely BB territory, and then many of them have now migrated back up to investment grade or BBB levels," said Brezzaeano, "And as they do that, the yield spread on their securities compresses."
He cited a big example of that for the overall market was Ford Motor Co., and there were others as well, he said.
"Then it made its way back to the investment-grade space," said Brezzeano, "and even though it wasn't providing the significant yield advantage for us, it provided appreciation potential as the spread compresses when it moves from high yield to investment-grade."
"By and large, we'd like to have more upgrades than downgrades, and with that advantage, a repeatable process where we've been doing this for decades, it works," said Brezzeano. "And over time, we're pretty good, we believe, at security selection."
Ben Santonelli, assistant portfolio manager of the Polen bank loan strategy, said in an interview the strategy also had a yield advantage, although it was a little less than the high-yield strategy, at about 75 basis points.
Santonelli said the strategy tends to be in the middle markets, with slightly lower quality than the overall index.
"Single B and C loans did outperform BB, so that was definitely a tailwind that the portfolio had and benefit from in '23," said Santorelli, "and then when I think across sectors and I look at where we generated performance, the service sector was an overweight where we had some outperformance, and specifically the kind of early childhood education space."
These were the kinds of services that "got beaten down pretty hard" during COVID, but capital markets thawed, particularly in the second half of 2023, and some of those kinds of businesses' fundamentals rebounded, Santorelli said.
"We did see some decent refinancing activity there," he said. "So we got not only a very nice coupon, but we also got some price appreciation as the pull to par that took place on the refinancing."
Santonelli is also lead portfolio manager of the manager's credit opportunities strategy and co-portfolio manager of U.S. opportunistic high yield.
Ranked sixth was Brandywine Global Investment Management's high-yield strategy, which returned a gross 15.73% for the year ended Dec. 31.
Bill Zox, portfolio manager, said in an interview the strategy reflects the firm’s focus on alpha, and not beta, with the idea that the best values in the markets are not the top 100 issuers in the market, which they consider to be the “beta” of the market. Instead, they primarily focus more of their time on new issuers, infrequent issuers and other issuers where there will be “less competition and less eyes on those situations.”
Zox said interestingly, the strategy had virtually no exposure to CCC, where the strongest returns lay in 2023.
"We still managed to find individual situations that generated very attractive returns without taking on the risk of the CCC part of the market," said Zox. "I would highlight nonbank financials, which were big beneficiaries of the turmoil in the regional banks a year ago."
Zox said any nonbank such as mortgage servicers and originators, consumer lenders and auto lenders faced less competition because many banks were concentrating more on capital and liquidity than growth.