Ron Heller, the current CEO of Peritus and a former Super Bowl champ from the San Francisco 49ers, spoke with Money Management Executive about his firm's High Yield ETF (HYLD).
Peritus is the only actively managed high-yield ETF in the marketplace. Can you describe why you seem to lack competitors?
Our stated goal is to provide a high tangible yield and some capital appreciation, with the income distributed to investors monthly. We accomplish this by primarily investing in high yield bonds and leveraged loans, concentrating more on the secondary market. As an active manager, we are able to focus exclusively on the credits we feel offer the best risk/return value, rather than tracking an index or embracing the "one of everything" or "the biggest most liquid" approach.
We believe that our focus on security selection not only allows us to maximize yield, but also manage risk within the portfolio. For instance, unlike the passive products, we can avoid the overvalued names; right now we see a sizable portion of the market trading at hefty premiums, as well as the questionable, highly levered securities that have unsustainable capital structures. In both instances there are likely to be losses coming their way.
One reason we are the only actively managed high yield ETF is that getting an actively managed vehicle approved is a grinding process and a test in patience and commitment.
Additionally, many specialty credit managers have business models that charge significantly higher fees so they don't want to cannibalize their existing business models. Lastly, transparency is always an issue. Peritus believes that transparency is something investors demand today and have no issue in meeting these demands.
You now have $426 million in assets. Can you give me a sense of your pace of growth?
As a smaller or emerging manager it has been difficult to get our name in the mix of the giants. The marketing/sales budgets by the big ETF and mutual fund companies dominate the headlines everywhere.
Even though we have been managing high-yield portfolios for a couple of decades, we have not had a public profile or vehicle until the Peritus High Yield ETF (HYLD). We will have our 3-year track record in HYLD at the end of this month and will then get a Morningstar rating which will help to get HYLD noticed.
Our assets in HYLD are approaching $500 million and I think the investment community sees we are here to stay and that we have talent at picking bonds and loans as evidenced in our performance.
You see a lot of potential in oil and energy. How are you embracing those sectors and why do you believe that area to be best positioned for growth?
We believe that conventional oil production around the world is struggling to keep up with demand. Brazil and Kazakhstan are two very recent examples of production estimates that are wildly optimistic and will not be met.
At the margin, Nigeria, Libya, Iraq and Russia are not friends to the U.S. or stable regimes yet they control a great deal of the market. We are focused on oil sands production and certain light oil areas in the U.S. where we believe rates of return are very attractive.
Which sectors are you avoiding in your ETF?
We are sector agnostic but we are seeing plenty of over-valued merchandise to avoid.
We have tended to avoid Financials and Gaming. Gaming is not what we view as a consumer essential and financials to us are very opaque and difficult to analyze. The index-based ETFs are forced to buy these sectors and we clearly have the discretion to avoid them.
You say that professional investors need to convince advisors and retail investors that the high-yield market is extraordinarily significant and you have said this is often lost on advisors and retail investors. Why do you think that this isn't accepted by them?
High-yield or junk bonds have had the term "risky" associated with it since the late 1970s when this asset class primarily consisted of fallen angels and private placements used for business plan financings and M&A transactions.
Today this non-investment grade debt market (combining bonds and loans) is more than $2 trillion, about a third of the corporate debt market. High-yield gets only a token allocation while Investment Grade gets large allocations in fixed income allocations thus it is a constant education process.
Risk is a relative term and the risk of the lack of covenants in investment grade bonds typically goes unnoticed. Just because a bond is rated as investment grade does not mean the company can run into trouble and have their bonds downgraded. All of a sudden, an investment grade bond owner is now a junk bond owner with no covenants/protection. New debt can come in senior to their position with them having no say in the process. We get paid to know the covenants in our bonds, which can be a significant difference between index-based investing and active management.
What would make this market more attractive to investors? Will you be tweaking your product at all to make it more attractive to them?
HYLD is the only actively managed ETF and the only product that has both bonds and loans under the same hood. We are able to offer a short duration like the SJNK or HYS products, but keep our dividend yield well above our competitors. We do this through research and security selection as we don't have to manage to an Index or a particular style.
One of the issues investors have raised is our fee, 1.2%, which we believe is more than fair.
On a personal note, you're a former professional football player and were a member of the 1988 San Francisco 49ers that won Super Bowl XXIII. How did you get into this space?
I knew my NFL career would come to an end one day and I would have to get a "normal" job. I have always had a thing for numbers and could read information and make quick decisions based on the data.
Football was similar in that we had to study plays, know the schemes, know what every position did each play, and while on the field react to situations and make split second decisions. I think the NFL did a great job in preparing me to become a stockbroker with Smith Barney, and then to head up our trading and portfolio management department at Peritus.
The NFL did a great job of preparing me for the work I do today. To be a champion in the NFL is no different than being the leader in performance in investing. Work longer, work harder, work smarter, and never being comfortable where you are, those are the keys to success.
