All-Weather
All of which brings us to the current realities in fixed income . “ I think the biggest thing out there now is the inflation dynamic ,” Garfin says . “ One of the biggest contributing factors to that relates to tariffs . We don ’ t have great clarity on how that will shake out , but I think the market was pricing in a fairly elevated concern around that .”
He notes that rate expectations are also unsettled , as investors who priced in a steady diet of federal funds rate cuts by the central bank during the course of 2025 now expect one or two reductions at best .
“ We ’ re in a less predictable time ,” Delbos says . “ It ’ s likely there will be some hiccups along the way ,” he says , and they will likely be things unforeseen . “ But I think we ’ re well-positioned to navigate that .
“ One of the things we pride ourselves on is being an all-weather fund ,” he continues . “ We ’ ve performed pretty well in both up and down markets .”
A big reason for that is the fund ’ s flexible approach in which it darts in and out of opportunities beyond high yield , depending on the market conditions . The fund ’ s bogey is the Bloomberg U . S . Corporate High Yield 2 % Issuer Capped Index , but Garfin and Delbos are active managers and use the index more as a rough framework than a measuring stick .
“ We ’ re benchmark aware , but we ’ re not married to a benchmark ,” Garfin says . “ It ’ s instructive to understand how big something is within a benchmark as we think about sizing the different positions . It ’ s more a function of understanding the risks we ’ re taking .
“ When we evaluate ourselves , we primarily do it versus our peer group ,” he adds . “ Our goal would be to be in the top quartile within our peer group .”
At different points in time they ’ ll take larger positions in investment-grade bonds and / or leveraged loans when they find these more attractive on a risk-adjusted basis than comparable high-yield bond risk .
Non-investment-grade bonds are rated lower than “ BBB- ” or “ Baa3 ” by the major rating agencies . A couple of years ago ,
Delbos explains , the fund had a roughly 10 % stake in investment-grade bonds because the risk and opportunities in the triple-B market were much more attractive than they were in double-B securities . But he feels that ’ s no longer the case .
“ Today we have very small exposures to investment grade ,” Delbos says . “ We have about 10 % exposure to leveraged loans . We like loans versus high yield , especially in some cap structures where there are both loans and bonds , because loans offer greater current income .”
But the managers say they don ’ t stray too far from their home base of high yield .
“ I think the biggest thing out there now is the inflation dynamic . One of the biggest contributing factors to that relates to tariffs . We don ’ t have great clarity on how that will shake out , but I think the market was pricing in a fairly elevated concern around that .”
— Mitchell Garfin
“ The vast majority of the portfolio will be invested in high-yield bonds the vast majority of the time ,” he says .
Top Down / Bottom Up
The BlackRock High Yield Fund ’ s investment process is a mix of top-down macro calls and bottom-up security analysis . Garfin and Delbos work with a 22-member research team to construct their portfolio , which recently held roughly 1,500 positions .
Ideas come from a variety of sources . It could be the analysts doing research . It could be traders . It could be other portfolio managers or other professionals at BlackRock . “ Plus , we ’ re aware of what ’ s in the investable universe within our benchmark ,” Delbos says .
He points out that they pride themselves on being bottom-up credit pickers and very fundamentally focused . The way it works is that analysts do work on a particular credit , and they ’ ll put together a model and forecast cash flows . They ’ ll sit down as a team and discuss relative values to decide whether to make a particular investment , how they want to size that and how it would work with the rest of the portfolio . Finally , they ’ ll look at whether they need to do something within the portfolio to offset risk by buying or selling a particular name .
“ But at the end of the day the most important thing we do is to make sure we ’ re invested in the right companies within the most appropriate yield context and value ,” Delbos says . “ And avoiding companies that have trouble or might have trouble down the road is how we create alpha for the fund .”
That said , he and Garfin make a topdown decision on how they want the portfolio to be positioned from the standpoint of beta , duration and yield curve . From there they ’ ll populate the portfolio with the bottom-up positions that fit that profile .
“ We build from the bottom up , and that ’ s where the majority of our alpha creation comes from ,” Garfin says . “ But you have to be really thoughtful about the top-down .”
Cash Flows
The fixed-income scene might be unsettled , but Garfin and Delbos are optimistic about the U . S . economy ’ s nearterm growth outlook .
Portfolio Statistics
Number Of Holdings 1,483 Average Coupon 6.67 % Yield to Maturity 7.64 % Yield to Worst 7.35 % Effective Duration
1.72 years Std . Dev Fund / Benchmark 8.35 / 8.38 Turnover Ratio 66 % Net Expense Ratio 0.58 %
Portfolio stats as of 12 / 31 / 24 . Expense ratio figures are for the institutional share class . Standard deviation ( three-year period ) versus the Morningstar High Yield Bond Index . Sources : BlackRock and Morningstar .
MARCH 2025 | FINANCIAL ADVISOR MAGAZINE | 45