As of 12-31-2017

Market Overview

For the three months ended December 31, 2017, the high-yield market slightly outperformed the investment-grade bond market. For example, the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Bond Index (BBC2%HYBI) returned 0.47% versus a 0.39% return for the Bloomberg Barclays Aggregate Bond Index (Aggregate), a measure of high-quality bond performance.

High-yield bonds outperformed the Aggregate for the eighth consecutive quarter. The market continued to benefit from a global synchronized economic expansion that appeared to be strengthening as 2017 came to a close.  This is being driven by a business-friendly administration in Washington, accommodative central bank policy outside the U.S., high levels of employment as well as strong levels of business and consumer confidence.  These factors led to strong corporate earnings, high levels of cash generation by corporations and declining default rates further supporting high-yield bonds.  These positive drivers also led to surging equity markets.  From a macro standpoint, the December passage of tax reform would seem to be another factor to add to the long list of items positively impacting U.S. economic growth and corporate earnings.  Tempering these positives from a high-yield bond perspective were less-than-compelling yield spreads to begin the period and some aspects of tax reform legislation that may negatively impact a subset of high-yield companies.  The overall impact of these factors can be seen in the decline in the yield spread between the Credit Suisse High Yield Bond Index and Treasury securities with comparable maturities that tightened from 402 basis points to 394 basis points during the quarter.

Within the high-yield market, the strongest-performing major industries relative to the BBC2%HYBI were Independent Energy, Electric Utilities, Transportation Services, Aerospace & Defense and Other Industrials. The worst-performing major industries relative to the BBC2%HYBI were Wireless Telecommunications, Wireline Telecommunications, Consumer Products, Cable & Satellite and Health Care. 

From a quality perspective, the credit sensitive CCC-rated sector led the way with a 1.02% total return. The higher-quality BB-rated sector followed with a 0.39% total return while the B-rated sector returned 0.37%.  

Fund Performance

The following discussion relates to the fund’s Institutional Shares relative to the BBC2%HYBI. The fund outperformed the BBC2%HYBI. The fund was positively impacted by its underweight to the poor-performing Wireline Telecommunications sector. The fund also benefitted from strong security selection in the Technology sector.  The fund’s equity holdings significantly outperformed the BBC2%HYBI which benefitted performance.  Specific high-yield issuers held by the portfolio that positively impacted performance relative to the BBC2%HYBI included:  Valeant Pharmaceuticals, Ortho-Clinical Diagnostics, Freeport-McMoRan Group, Pinnacle Entertainment and Ensemble Merger Sub.  The fund’s three top-performing equity holdings were Eldorado Resorts, Penn National Gaming and Ally Financial.

The fund was negatively impacted by poor security selection during the quarter in the Retail, Consumer Products, Independent Energy, Midstream and Wireless industry sectors. Specific high-yield issuers held by the portfolio that negatively impacted performance relative to the BBC2%HYBI included:  FGI Operating Company, PetSmart, Mallinckrodt, Sprint and Altice Luxembourg.  The fund’s total return for the period also reflects actual cash flows, transaction costs and other expenses that were not reflected in the total return of the BBC2%HYBI.

Past performance is no guarantee of future results.

Click on the Performance tab for standard fund performance.

Click on the Portfolio Characteristics tab for information on quality ratings and the fund’s top 10 holdings.


We continue to believe that the lows in credit spreads for this cycle are yet to come as the global synchronized economic expansion, strong corporate earnings aided by tax reform and surging corporate valuations as illustrated by rising stock markets will push credit spreads to lows consistent with prior cycles. However, low absolute (and possible rising) interest rates and well below median starting yield spread levels will most likely temper both the absolute and relative returns expected for high-yield bonds.  In the short term, tax reform will benefit most high-yield issuers although a subset may be negatively impacted by a limit on the deductibility of interest expenses.  In the intermediate term, the limits on the deductibility of interest expense may lead those corporations negatively affected to optimize their capital structures to reduce this negative impact.  Longer term, the limit on the deductibility of interest expense may lead to lower secular corporate debt levels as some of the tax benefits associated with higher debt levels is reduced.  This could also potentially lead to higher corporate credit quality in the high-yield market, and with it, lower long-term default rates and lower secular yield spreads.