PORTFOLIO SPOTLIGHT
believes being small is an advantage here because many bond funds are too large to invest in these smaller issues . They say this can create attractive mispricing opportunities that they ’ re able to exploit .
Intrepid seeks companies that generate free cash flow and have returns on invested capital that exceed the cost of their debt . The fund also favors companies with a favorable debt-to-enterprise value ratio , which measures a firm ’ s equity cushion . “ We think about liquidity parameters relating to a company ’ s ability to pay us back ,” Hayes explains .
The two managers also want to own mature businesses with understandable business models and recession-resistant products that they can value with a high degree of confidence . And they like companies whose management teams have acted in the best interests of shareholders and bondholders .
Travis and Hayes work in tandem with Matt Parker and Joe Van Cavage , both of whom have worked on the fund for the past five years . Earlier this year they were elevated to the title of co-portfolio managers , with Travis and Hayes listed as colead portfolio managers .
They have a universe of 10,000 eligible securities on their screens as fund candidates . But their winnowing process trims the list of viable candidates to a very small fraction of that .
Whoever finds an idea pitches it to the group , and as a group they decide whether it ’ s worth pursuing further . If so , the next step is crafting a five- to 10-page write-up on the company . Then one person is assigned the role of devil ’ s advocate and tries to poke a hole in the thesis . Ultimately , any names added to the portfolio must be unanimously approved .
“ If a name doesn ’ t make it into a portfolio it goes on our shopping list , and when the time is right maybe we ’ ll revisit it ,” Hayes says . “ So it ’ s not wasted work in our opinion , it ’ s just deferred work .”
Intrepid looks for companies whose bond prices are depressed because , in their view , the market has unfairly punished them for issues the portfolio managers believe are temporary or fixable .
That creates an opportunity to buy at attractive yields .
“ I think it ’ s very much a credit picker ’ s or risk asset picker ’ s market ,” Hayes says . “ Not all companies or high-yield bonds are created equal . We think we earn our stripes by finding the treasure amidst the rubble .”
Concentrated Portfolio
The end result is a concentrated portfolio generally consisting of just 40 to 50 names , which is much less than the typical fixed-income fund .
“ We don ’ t think there ’ s much diversification benefit beyond 50 or 60 names ,” Hayes says . “ Our view on this is we should stand behind our research , and if we want to get the benefit from the alpha we ’ re generating from our research we need to be this concentrated .”
Despite its narrower focus , the portfolio is still energetic , with a high turnover rate — which it recently reported at 112 %.
Travis says that turnover reflects the fund ’ s duration , which was 2.2 years as of the first quarter . ( Shorter duration fixedincome securities typically have shorter maturity dates , leading to quicker turnover .) That ’ s compared with 3.3 years for the ICE BofA U . S . High Yield Index and 6.1 years for the Bloomberg U . S . Aggregate Bond Index . That means the Intrepid fund turns over its portfolio at a faster rate than funds more closely tracking either of those indexes .
But high turnover means less tax efficiency . Hayes says tax awareness is part of his management team ’ s thought process , and they look for ways to be efficient , but it ’ s not something they prioritize . “ Our investors think about it and it ’ s part of their calculus . Obviously with the turnover there are tax implications ,” he says .
“ Our view , and our investors agree with that , is that it ’ s more than offset by the alpha that we ’ re generating through these short-dated opportunities .”
He posits that the fund ’ s turnover is one of the big reasons for its success . “ We have money coming back to us , which allows us to reassess the state of the world as things change .”
Travis offers that the fund ’ s high monthly distribution yield of roughly 8 % makes it a good fit in the fixed-income portion of a tax-deferred or tax-advantaged account , like an IRA , where the dividend income can accumulate on a tax-deferred basis . “ Though we believe that the fund ’ s income profile is attractive even on a taxadjusted basis ,” he says .
Hayes says a number of large advisory investors have made the Intrepid Income Fund part of their core fixed-income
“ Obviously , we haven ’ t been doing the same thing everyone else is doing when we ’ re up 600 basis points over the past five years and the [ Bloomberg Agg ] has been virtually flat .”
— Mark Travis
holdings because they agree with the portfolio managers ’ contention that short duration — in tandem with prudent credit picking — is the right strategy for risk-adjusted returns right now .
But what happens when the Fed eventually starts cutting interest rates and longduration bonds become a more attractive option ( if they aren ’ t already as investors anticipate lower rates , which would boost longer-duration bond prices )?
“ If you have a strong view on what the Fed is going to do , then go for it ,” Hayes says . “ Our view is that maybe if … you ’ re getting equity-like returns for high-quality credits , then it gets interesting and maybe then we ’ ll start to nibble at some of the medium and longer-duration opportunities . But right now , in our view there ’ s no argument that [ long duration ] is a better place to deploy capital in the fixed-income world . Hence , we think we belong as a core option .”
46 | FINANCIAL ADVISOR MAGAZINE | JUNE 2024 WWW . FA-MAG . COM