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Rating:Intrinsic Value Fixed Income: An Equity Fund Shop Digs Deeper Not Rated 0.0 Email Routing List Email & Route  Print Print
Friday, February 26, 2016

Intrinsic Value Fixed Income: An Equity Fund Shop Digs Deeper

Reported by Neil Anderson, Managing Editor

A Midwestern mutual fund shop that specializes in value equity investing is expanding its fixed income push.

John McClain
Diamond Hill Capital Management
Portfolio Manager
Columbus, Ohio-based Diamond Hill Capital Management [profile] debuted its second fixed income fund, the Diamond Hill High Yield Fund, at the end of 2016. And its first fixed income fund, the Diamond Hill Strategic Income Fund, is about to be rebranded.

The three-star, $344.2-million Diamond Hill Strategic Income Fund dates back to 2002 and is PMed by John McClain, Suken Patel, and Bill Zox. On Monday it will become the Diamond Hill Corporate Credit Fund. Craig Tann, director of national accounts and Diamond Hill Capital Management, describes the rebranding as a way to push back against a mistaken impression that is a go-anywhere bond fund; it's not, and can only invest in corporate credit, high yield or investment grade.

Suken Patel
Diamond Hill Capital Management
Research Analyst
As for the new Diamond Hill High Yield Fund, it's PMed by the same trio: McClain, Patel, and Zox. Zox sees the high yield market as ripe for a capacity-constrained approach, with Diamond Hill's own intrinsic value approach. High yield (i.e. junk) bond mutual funds have had a rough time as of late, a rough time epitomized by the December collapse of the now-infamous Third Avenue Focused Credit Fund.

"The best way to manage that risk is to not get too big," Zox tells MFWire. "I never hear anyone talking about closing a high yield strategy.

The way Zox sees it, high yield bond funds can suffer from the liquidity and concentration problems that small cap stock funds face. And as many fundsters soft- or hard-close their small cap funds once they get big enough that those concentration and liquidity problems get big, so, too, should fundsters voluntarily cap their own high yield funds, Zox argues. Yet he worries that many fundsters treat high yield bond funds more like large cap equity funds.

"The market is really dominated by funds that are, in many cases, $5 billion plus in assets, and they might have multiples of that in separate account high yield assets," Zox says. "You wouldn't see an active small cap equity manager talking a $5-billion-to-$10-billion equity fund."

Bill Zox
Diamond Hill Capital Management
Portfolio Manager
"We think capacity there is $1 billion to $2 billion," Zox adds. "The high yield market is somewhat similar in size and liquidity to the Russell 2000 small cap equity universe."

That constraint, Zox says, comes from the Diamond Hill team not wanting to own more than 10 percent of any one bond issue: otherwise, he says, when something goes wrong "you either get killed on the price or you can't sell it."

Corporate credit, Zox says, "was the first logical extension" into fixed income for Diamond Hill, and high yield he sees as standing out right now in terms of opportunity. Yet he offers no hints as to where Diamond Hill's fixed income push might go next.

"Over time there very well may be logical extensions from here into further areas of fixed income," Zox says. "We're always open to extensions that are in the best interest of clients and within our capabilities."

In terms of marketing, the Diamond Hill team is "not doing any specific new marketing around fixed income," Tann says.

"We're making it more of a focus in all of our meetings, spending more time on the message," Tann says. "It's just been made a priority." 

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