by Olivia Barbee, Wells Fargo Asset Management
Learn how company fundamentals and credit research help investors tune out near-term market noise. Portfolio manager Tom Price explains.
Tom Price: We donât really worry too much about the near-term market environment. What weâre really doing is selecting credits where we think weâre going to get paid back as we expected to when we purchased the bond.
Olivia Barbee: Thatâs Tom Price, manager of the Wells Fargo Short-Term High Yield Bond Fund. Iâm Olivia Barbee, and you are On the Trading Desk. Tom Price joined us recently to discuss how he focuses beyond near-term market noise to take a longer-term view for investors. Yet, Tom is keenly aware of the current market environment and its implications for investors.
Tom: Well, obviously, there are a lot of economic factors at playâunemployment, whatâs happening with inflation. Obviously the Fed, it would like to have rates a little bit higherâbecause rates are so low right now, itâs impacting savers; thereâs not much income.
Olivia: Tom explains how the team is positioning for opportunity.
Tom: In short-term high yield, we donât do a lot depending on the market environment. For us, itâs really about selecting bonds from issuers where weâre comfortable that weâre going to get paid back when we expect to get paid back, and thatâs where our credit analysis comes into play. But if you think about it, weâre buying BB and B securities on the shorter end of the maturity curve, and thatâs a fairly small universe. We donât do a lot of things like a lot of fixed-income managers might be with duration and yield curveâthings youâll hear in the investment-grade spaceâbecause, really, the high-yield market is driven more by what happens with credit. Itâs more attuned to what you might see in the equity marketâis the company doing well or not? And so, because weâre short and we buy BB and B, we donât really reposition the fund much. The one thing we can do is we can increase our exposure to bank loans, which have a floating-rate component. That would be one thing we could do; we are looking to do it, but we are looking for a more attractive entry point before we make an increase in our bank loan allocation. But otherwise, itâs really about picking bonds that weâre comfortable that weâre going to get repaid.
Olivia: One thing you may have picked up on in this program is Tomâs emphasis on credit research in terms of selecting investmentsâintensive credit research is something truly unique to his approach.
Tom: Intensive credit research is basically looking at the credit and making an assessment of the creditworthiness over your time horizon. And for us, we want to make sure we think thereâs good creditworthiness well beyond our time horizon. Because if we make an assessment that this companyâs going to pay us back in three years, but weâre worried about it in three years and three monthsâif weâre off by that much, we can make a mistake, have a poor experience for our client. So what weâre really trying to do is a solid assessment of the financial statements of the company. We are going to look at the capital structure. Weâre going to look at the balance-sheet income statement and cash-flow statement and look at the characteristics of liquidity, free cash flow, and asset coverageâthings that give us comfort that weâll get paid back as we expect. And itâs a key to what we do. Itâs a key to being successful in the high-yield market. And itâs something weâve stayed focused on for many years.
Olivia: Tom goes on to detail what characterizes a company heâs comfortable lending to because, in his opinion, not all strong, fast-growing companies handle their business the same way.
Tom: If theyâre a strong, growing company, thatâs when we sometimes get concerned because a lot of times there will be an aggressive use of their balance sheetâbecause if theyâre growing really well and theyâve got public stock, the market has an expectation that theyâll continue to grow and theyâll be aggressive with the use of their balance sheet. As a lender, we want them to be conservative with the use of the balance sheet. So if a company is stable growing, thatâs actually great for us. There are great assets behind your bonds. And so, thatâs another key factor weâre looking at.
Olivia: Tom leaves us with this parting thought.
Tom: We think the short-term high-yield space can be very attractive for our clients versus their enhanced cash alternatives. And if we can do our credit process appropriatelyâwhich weâve been able to test over a long time periodâwe think we can do it in a lower-volatility fashion than other high-yield competitors. But itâs very important for us to deliver what our clients expect.
Olivia: Thatâs it for this week. If youâd like to learn more about Tom Price and the funds he manages, visit wellsfargofunds.com. Weâll keep you current on markets and the economy throughout the week on our blog, AdvantageVoiceÂź, and right here On the Trading Desk. Until next time, Iâm Olivia Barbee; take care!
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