Our High Yield strategy focuses on a high level of current income and invests in corporate straight debt, out-of-the-money convertibles (delta less than 0.4), hedged convertibles (convert arb.), dividend-yielding equities and other equities that can be combined with options to generate additional income while managing downside risk.

The Panthera Capital Difference

Our High Yield strategy focuses on enhanced income by not only including debt (straight debt and convertibles), but also high yielding equities plus option strategies, e.g., overwrites/covered call writing. In this way, we attempt to not only derive additional income, but also capitalize on modest equity up moves to increase returns while reducing our duration risk. As such, we believe our strategies offer better convexity than straight bond-focused high yield offerings.

Our options strategies are designed to deliver an asymmetric return profile. Depending on market conditions (including volatility skew), we leverage the following collar-based strategies:

  • buy-writes – writing covered calls (to enhance yield, particularly during periods of elevated volatility)
  • selling call spreads when uncovered
  • purchasing puts (to add downside protection) and
  • put spreads (to enhance yield, particularly in times of attractive skew).

In addition to generating yield, when combined with options, straight debt can create asymmetric payoffs like converts. For example, if the typical balanced convertible bond had a straight debt value of 75 cents on the dollar and 25 cents of option value, a straight bond may be purchased and supplemented with a call option to generate a similar value proportion. This not only creates a similar payoff, but it avoids the overvaluation that can occur among some balanced converts.

It can also enable the optimal combination of credit and equity. For example, within a sector of focus, a manager may select an equity deemed to have superior upside catalysts and combine it with an attractive bond from another issuer, thereby enabling a more optimal combination of credit and equity. Furthermore, by staying involved in the capital structure, PC plans to maintain a heightened level of readiness to put capital to work in the equity if and when the opportunity presents itself, i.e., a valuation discount emerges. This is in contrast to other silo-based managers who may be unfamiliar with a certain stock as it does not currently meet their strategy criteria and may not be prepared to make a quick portfolio addition when a fleeting opportunity occurs. We believe capitalizing on moments of rapid sentiment changes often lead to the largest alpha. Furthermore, we do not benchmark to a major equity index as we focus on our long positions where we believe our equity alpha is relatively high.

High Yield Model Portfolio

High Yield Summary

  • PC’s Strategy – We target a convex return profile, i.e., elevated income with equity-like returns but with reduced risk, i.e., lower beta, higher Sharpe/Sortino ratios. To generate enhanced yield, PC invests in:
    • Corporate straight debt
    • Convertibles – out-of-the-money/busted convertibles and convertible arbitrage
    • High dividend yielding stocks paired with active options strategies
    • Options
  • Risk management – in addition to collars, we manage individual security risk through concentration and tight sell stops (to promote downside protection). We target systemic risk as hedges against our equity longs and therefore typically target proxy hedges. We target put protection in the range of 25-50% of our equity notional for our downside guardrails while targeting 50-75% net notional short calls.
  • Leverage – We target sub-1.5x (50%) leverage, which we believe is appropriate as it allows for additional upside without adding undue risk.
  • Suitability – Apt for investors seeking an elevated rate of income and capital preservation, i.e., willing to sacrifice some upside in exchange for attractive downside protection relative to an all-equities or all-fixed income basket.
  • Relevant Benchmarks – iShares Core High Dividend ETF (HDV), Bloomberg Barclays US Corporate High Yield Total Return Index Unhedged (LF98TRUU), Chicago Board Options Exchange S&P 500 BuyWrite Monthly Index (BXM), Bloomberg Barclays US Agg. Gov/Credit Total Return Index (LUGCTRUU), Hedge Fund Research HFRX Relative Value Fixed Income Convertible Arbitrage Index (HFRXCA).