AdvisorShares is set to begin trading their new “Peritus High Yield ETF” (NYSE:HYLD) tomorrow December first. HYLD will be the first actively-managed ETF to focus on the junk bond sector and it will be managed by Santa Barbara based Peritus Asset Management. The fund will look to target investors on the lookout for higher yields in their portfolio. The goal of the Peritus High Yield ETF is high current income with a secondary goal of capital appreciation.
TOTAL ANNUAL FUND OPERATING EXPENSES AFTER REIMBURSEMENTS: 1.35%
Peritus is a unique value focused, active credit manager capitalizing on opportunities in the corporate bond market. They place limited value on the rating agencies and their methodologies, believing the agencies lag the market perception of risk and often ignore critical components of a company’s credit profile. Instead, Peritus views credit as either “AAA” or “D,” either the credit is expected to pay its coupon and principal obligations or it isn’t. By avoiding arbitrary restrictions on aspects such as ratings and subordination and not being forced to take the one-of-everything approach as in the index products, Peritus is able to focus exclusively on the credits where they see the best risk reward. In addition, HYLD may utilize U.S. Treasuries in an effort to hedge against adverse market declines in periods of excessive exuberance as evidenced by compressed spreads and questionable underwriting standards. Short term treasuries (less than 5 year maturities) benefit from the “flight to quality” trade when there is a market disruption. While there is an opportunity cost in adding Treasuries to the portfolio (the yield is less), the possible Treasury “overlay” is expected to help potentially reduce risk and maximize the income stream regardless of the environment.
PRINCIPAL INVESTMENT STRATEGIES
Peritus I Asset Management, LLC (“Peritus” or the “Sub-Advisor”), seeks to achieve the Fund’s investment objective by selecting a focused portfolio of high yield debt securities (commonly referred to as “junk bonds”), which include senior and subordinated corporate debt obligations (such as bonds, debentures, notes and commercial paper) and leveraged loans. The Fund does not have any portfolio maturity limitation and may invest its assets from time to time primarily in instruments with short-term, medium-term or long-term maturities. In selecting securities for the Fund’s portfolio, Peritus performs its own independent investment analysis of each issuer to determine its creditworthiness. Peritus takes a deep value contrarian approach to the credit markets, foregoing relative value and new issue participation in favor of absolute returns. Peritus focuses on the secondary market, predominantly investing in assets at a discount to par ($100), allowing for a potential opportunity to generate capital gains in addition to current yield. Peritus believes that structural and technical inefficiencies exist in the secondary credit markets, which create tremendous investment opportunities; and by holding a diversified but limited number of securities, the portfolio will be constructed of securities that provide exposure to industries believed to offer the most value to the Fund.
The Fund is an actively managed exchange-traded fund (“ETF”) and thus does not seek to replicate the performance of a specified index. An actively managed ETF uses an active investment strategy to meet its investment objective. Accordingly, the Sub-Advisor subject to the oversight of the Advisor and the Board has discretion on a daily basis to manage the Fund’s portfolio in accordance with the Fund’s investment objective.
The Sub-Advisor seeks to achieve the Fund’s investment objective by selecting a focused portfolio of high yield debt securities (commonly referred to as “junk bonds”), which include senior and subordinated corporate debt obligations (such as bonds, debentures, noted and commercial paper) and leveraged loans. The Sub-Advisor aims to acquire these securities at discounts to par ($100), which will allow for a potential opportunity to generate additional capital gains. Debt securities that comprise the Fund’s strategy are individually picked by the Sub-Advisor in the belief that each bond can add value in terms of high risk adjusted returns. By holding a diversified but limited number of securities, Peritus can pick and choose the industries and securities they feel offer the most value to the Fund. These high yield corporate debt obligations and loans are principally purchased on the public secondary market.
Peritus seeks to exploit the fact that most fixed income investors continue to use ratings as one of their primary investment tools. Peritus, however, believes that the focus should be on the fundamentals of the businesses in which the Fund invests rather than ratings. Peritus views credit as either “AAA” or “D” (i.e., it either pays or doesn’t). Due to this investment ideology, Peritus places limited value on credit ratings and instead focuses on true cash flow while looking to buy credit at prices that it feels provide a margin of safety. Additional factors are considered when constructing the portfolio including, but not limited to, excess cash on the balance sheet and/or a history of producing real free cash flow, as well as a capital structure that can be sustained on conservative forecasts.
Peritus reverse engineers the traditional financial analysis process when reviewing each issuer’s creditworthiness. Each analysis begins with the Statement of Cash Flows, moves to the Balance Sheet and then to the Income Statement. The investment team looks at a complete appraisal of the business’ intrinsic value, rather than just traditional credit analysis. Through fundamental and valuation analysis, the Sub-Advisor not only determines whether an investment should be made in a certain company, but also where in the capital structure (secured, senior, or subordinate) the risk/return is most attractive.
For the full prospectus click: HERE
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