This Top Junk-Bond Fund Manager Wants to Pick Stocks for You Too

Federated Investors Inc.’s Gene Neavin, whose high-yield bond fund has outperformed all of its peers in the past five years, is betting he can repeat that success investing in the stock of companies with big debt loads.

Federated will begin marketing to investors this month a strategy dubbed “private-equity lite” that invests exclusively in the public stocks of highly levered companies whose complex capital structures typically ostracize them from the portfolios of equity investors.

Since 2010, the firm has generated 11 percent annualized returns in its Federated High Yield Trust, which oversees about $779 million. It started allocating to stocks in 2007 to differentiate the fund and boost returns.

“We’re really looking for beat-up stocks with depressed valuations,” Neavin said. “People forget that debt is good as long as it’s used responsibly.”

Pittsburgh-based Federated is the latest asset manager to seek returns from the equity component of the heavily indebted companies whose bonds they typically own.

Penn Capital Management Co., based in Philadelphia, filed April 30 to register a series of mutual funds with the Securities and Exchange Commission, according to a regulatory filing. Its Small-Mid Cap Equity strategy draws from the company’s involvement in the high-yield bond market to target undervalued companies, according to the Penn Capital’s website. Penn Capital’s Melissa Currie declined to comment on the filing, citing inability to speak while the registration undergoes SEC evaluation.

Repurposed Analysis

Scout Investments Inc.’s Equity Opportunity Fund was launched last year with the goal of outperforming the Russell 3000 index by investing in the stocks of leveraged companies. Putnam Investments LLC and Fidelity Investments run similar funds that target the public equity of heavily indebted companies.

The Federated strategy will extend the research the high-yield group currently undertakes to identify under-followed debt-laden companies experiencing catalysts like debt refinancings, changing credit quality, maturity or covenant triggers that would affect the value of the public equity, Neavin said.

“We’re doing all the analysis, why not invest in the stocks of these same companies?” Neavin said.

Capital Structure

The Federated Leveraged Company Stock Strategy will invest in about 50 stocks, many of which Neavin said he and co-portfolio manager Mark Durbiano already own in the junk-bond mutual fund. The Federated High Yield Trust currently allocates 12.9 percent to stocks, the second most among peers tracked by Bloomberg, including investments in the public equity of Time Inc. and Radio One Inc., according to data compiled by Bloomberg.

The company will begin marketing the strategy to institutional investors later this month as an alternative to private equity and as a complement to existing equity allocations. At $3 trillion, the combined market capitalization of the 600 publicly traded stocks whose credit is speculative-grade is bigger in value than the leveraged-loan and high-yield bond market combined, he said.

“It’s not the cleanest story for a fixed-income group managing equities, but I would say we’re really capital-structure investors,” Neavin said.

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