David L. Glancy

The equity edge over high yield

David L. Glancy , Portfolio Manager, 7/15/2015

Lower high-yield prices among energy companies are warranted and real — but that would not be a reason to add to high yield.

The time to buy high-yield bonds in quantity, in my view, is when they are deeply discounted.

But beyond valuation, one issue that requires great attention is liquidity. These days, many investors who are active in the high-yield asset class are yield-starved but less than savvy about the risks associated with high-yield bonds. A substantial pickup in high-yield default rates could send these investors running for the exit.

Within the high-yield corporate sector, a disruption has occurred because of lower oil prices and the impact on energy companies, which comprise a significant part of the high-yield bond market. But I do not view that as a buying opportunity.

A supportive environment for equities For stocks, in contrast, I believe the environment continues to be supportive. U.S. growth appears to be sustainable. Declining unemployment and lower energy prices are positive for consumers and businesses.

When I look at the overall equity market, stocks appear fully valued. But looking at the overall equity market is not really a part of my portfolio-construction process. Instead, my approach is to look at the potential of individual companies. And when volatility enters the picture, I aim to have enough cash on hand to add to positions or establish new ones, where I have conviction about the opportunity.