Phoenix Investment Advisers’ long/short strategy outperforms market benchmarks

By Abigail W. Adams

Portland, Me., Aug. 2 – With record outflows, tightening credit spreads and a 28% year-over-year drop in new issuance, warning signs are flashing in junkbondland with many questioning if overvalued credits may soon collapse.

For the nimble active manager, the current market conditions spell opportunity and with its long/short strategy, Phoenix Investment Advisers’ JLP Institutional Credit Fund is poised to take advantage, said president Michael Donoghue.

The firm

Phoenix Investment Advisers was founded in 2003 by Jeffrey Peskind, a 30-year veteran of financial markets with previous experience at White Ridge Asset Management, Banc of America Securities LLC, PaineWebber and Morgan Stanley.

Donoghue, also a 30-year veteran of capital markets and a former managing director at Morgan Stanley, joined Peskind at Phoenix Investment Advisers as managing director and president in 2006. The firm has since grown to a team of 22 with a combined 150 years of experience in financial markets.

“We’ve seen all the ups and downs in high-yields,” Donoghue said.

The fund

The JLP Institutional Credit Fund is one of two funds operated by Phoenix Investment.

It is focused on finding both long and short opportunities in the high-yield market to maximize returns.

And the track record is good, Donoghue said.

The fund has had compounded returns of 6.2% over the past two years, beating out long-only funds despite being hedged, Donoghue said.

With a duration of 2.4 years, the fund’s net yield to maturity is 7.2% compared to the ICE BAML’s High Yield index’s 6.5% net yield to maturity with a duration of 4.1 years and the iShares iBoxx $ High Yield Corporate Bond ETF with a 6% net yield to maturity with a duration of 3.9 years.

The JLP Institutional Credit strategy, a combination of the fund and separate accounts, has about $300 million under management.

By comparison, in the high-yield universe, about 50% of high yield assets are under the control of 20 of the largest managers.

For Phoenix Investment, the relatively small size of its fund enables it to quickly shift positions and execute its long/short strategy as opportunities present themselves, positioning it to perform well across cycles.

In 2016 when credit spreads “blew out” the fund was there to scoop up the fallen angels, netting a 22% return, Donoghue said.

In its seven-year history, the fund has seen only one of its holdings default, a nod to the analytic skill of Phoenix Investment’s team, which above all focuses on fundamental analysis.

In the current rate environment with credit spreads tightening, the approach has become defensive, Donoghue said.

The strategy

“This is an interesting time for a long/short strategy,” Donoghue said. “The rising tide lifted a lot of ships.”

While a company may have a double B rating, if fundamental analysis indicates the credit is weaker, it is a candidate for a short position.

There are interesting hedge opportunities in equities and in the CDX. However, the focus of the fund’s short positions is on the individual bonds of overvalued companies, Donoghue said.

While hedged, approximately 65% of the fund’s holdings are long.

Despite a largely flat high-yield market in 2018, there is a remarkable dispersion by sector, Donoghue said. The retail sector is up 3.68% year-to-date on one end of the spectrum with the automotive industry down 5.4%.

For the nimble investor, there are profits hidden in the large fluctuations in sector performance.

“We tend to gravitate towards the sectors that are out of favor,” Donoghue said. “We like to find the best quality credits in sectors that are out of favor that tend to trade wider.”

For the institutional credit fund, these opportunities have been found in retail.

When Amazon bought Whole Foods about one year ago, “people panicked,” Donoghue said. Many high-yield bonds fell, which is when Phoenix Investment Advisers swooped in taking large positions in names like Albertsons Cos. Inc. and Rite Aid Corp.

“We bought Albertsons with a 9% yield,” Donoghue said.

In addition to unrecognized credits in underperforming sectors, the institutional credit fund has sidestepped double B credits, which compose about 50% of the market, in favor of single B credits.

While double B bonds are the highest quality by credit rating among junk names, they are also the most vulnerable to interest rate risk.

“Single B bonds in this environment are a prudent credit risk,” Donoghue said. “We’re taking a limited interest rate risk and we’re focusing on prudent credit rate risk.”

Approximately 73% of the fund’s holdings are in single B credits, which has contributed to its outperformance.

Technically speaking

High-yield mutual and exchange-traded funds have seen record outflows in 2018 with $25.5 billion leaving the sector in the first half of the year.

For Phoenix Investment, the record outflows have provided yet another opportunity with the forced selling driving down the price of bonds, making them a good buy – and when inflows drive up the price, there is an opportunity to cash in on some profits.

However, at the end of the day, the crux of Phoenix Investment’s strategy and the focus of its fund is on the fundamentals of the companies issuing junk bonds.

“In the short run, inflows and outflows can move markets, but in the end its always about the fundamentals of the company and the health of the economy,” Donoghue said. “Money has come out, but the fundamentals are very strong.”

© 2015 Prospect News.
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