High Yield (below investment grade) and Bank Loan strategies offer insurance companies enhanced income potential with desirable diversification benefits. In addition to the income benefits of the asset class, the performance of high yield bonds has been similar to equities over the past two decades with dramatically less volatility.
In this prolonged period of historically low levels of interest rates, there has been a surge in refinancing by high yield issuers with heavy investor demand by income-focused investors such as insurance companies. Corporate balance sheets have improved as a result of this refinancing as well as the overall strengthening in the economy. We expect default rates to remain low over the next few years.
AAM offers our insurance clients the following strategies:
- Short Duration High Yield Bond Strategy: a broadly diversified portfolio of high yield bonds with a duration range of 1 to 3 years. The strategy seeks to provide a high level of income with an emphasis on relative price stability and principal protection.
- U.S. High Yield Corporate Bond Strategy: a broadly diversified portfolio of high yield bonds with a duration range of 3 to 5 years. The strategy seeks to provide a high level of income on a risk-adjusted basis over a full market cycle.
- High Income Floating Rate Strategy: a broadly diversified portfolio of floating rate bank loans. The strategy seeks to provide a high level of income with a focus on principal preservation and reduced exposure to changes in interest rates. Given their seniority in a company’s capital structure and the floating rate nature of the coupon, bank loans should play an important role as fixed income investors look to hedge their portfolios against inflation as the economy continues to recover from the 2008-2009 credit crisis.
AAM has partnered with Muzinich & Co. (www.muzinich.com), an institutional asset manager headquartered in New York with offices in London, Cologne and Paris, to serve as a sub-advisor for all High Yield strategies. Muzinich was founded in 1988 and manages over $16 billion in credit oriented strategies with a focus on BB and B rated bonds and loans. This higher quality focus within the High Yield universe reflects the general risk profile of many insurance company investors in High Yield strategies.