Portfolio Manager Perspectives

Jeff Benjamin

Short-term junk ideal for navigating long-term risk: RiverPark's Sherman

Fund manager generating solid returns with minimal exposure to interest rate risk; plenty of turnover

Jul 6, 2011 @ 12:19 pm

By Jeff Benjamin

+ Zoom

Short-term high-yield debt might be just the thing for those investors sitting on cash but worried about risk, according to David Sherman, manager of the RiverPark Short Term High Yield Fund Ticker:(RPHYX).

Mr. Sherman, a subadviser manager at Cohanzick Management LLC, readily acknowledges the “junk” status of most of the bonds on the portfolio, but he believes the strategy is an effective means of generating some liquid income in the current market environment.

“We do not view the fund as a total-return vehicle,” he said. “It's a short-term [investment] alternative in a very volatile world where the direction of interest rates is uncertain.”

As Mr. Sherman explains it, the nine-month-old fund is designed to navigate the risks of interest rates by holding bonds with an average maturity of six months and a yield to maturity of more than 5%.

He looks for bonds where the concerns that led the ratings agencies to deem them non-investment-grade are not relevant over the short time frame during which he expects to hold the paper in the fund.

By his calculations, between 40% and 60% of the portfolio will turn over every 90 days as the result of either a call by the issuer or maturing of the bonds.

Mr. Sherman, who has been managing high-yield portfolios for more than 20 years and currently manages more than $100 million in the strategy, looks for investments across a number of categories. Those include redeemed debt, which involves high-yield debt that has been called, and the issuers have the funding in hand to permit repayment of the instrument. He also looks for debt that has experienced a corporate event, such as when change of control of an acquired company results in a short-term maturity.

In addition, Mr. Sherman seeks out strategic recapitalizations — that is, when a company expresses an interest in refinancing its debt but has not announced it. He also targets cushion bonds, represented by high-yield bonds that trade on a yield-to-call basis, which means the bondholder earns a higher yield as time lapses and the debt remains outstanding.

Since the start of the year, the fund has gained 2.4%, which compares with a 4.2% average in the high-yield-bond-fund category as tracked by Morningstar Inc.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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