The credit markets are so vast that notwithstanding the bloody numbers for 2022, I figure someone, somehow, somewhere must be breaking even or in the plus column managing fixed-income funds. And I found such a guy. Fittingly, David Sherman shares the name of the legendary World War II tank, for he is in the vanguard of an onerous trench battle against relentless forces: inflation, recession, the Federal Reserve and everything else bent on destroying bond values.
Sherman is commander-in-chief of a platoon of actively managed, short-term, high-yield bond funds with the RiverPark and CrossingBridge insignias. The flagship is RiverPark Short-Term High Yield (symbol RPHYX), unfortunately closed to new investors. The fund is 1.4% in the green this year through October 7, yields 2.5% and has never had a losing calendar year since its launch in 2010. Among other Sherman vehicles, three CrossingBridge funds—Ultra Short Duration (CBUDX), Low Duration High Yield (CBLDX) and Responsible Credit (CBRDX), with an environmental, social and governance focus—are newer and much smaller. Each is offered as “institutional,” which means you need $50,000 to invest. Their 2022 returns range from minus 0.4% to plus 0.8%. And for a minimum of $2,500, there is RiverPark Strategic Income (RSIVX). It is down 3.5% through October 7, but its monthly distributions give it a yield of 5.3%, and its overall record since 2013 is excellent. That 3.5% loss compares well to similar funds with losses on the order of 8%.
How active fund managers earn their keepThe best of these results still trail risk-free Treasury bills and money market funds. And some active fund managers who stand out during a bear market are just plain lucky. But a talk with Sherman and a look at these funds has me convinced he has found a way to generate high and rising monthly income distributions on the order of 6% with less danger to principal than most types of bond funds.
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RiverPark Short-Term High Yield has a duration (a measure of interest-rate sensitivity) of 0.46 with a portfolio that yields 6.1% to maturity. I know of similar funds with roughly the same yields but durations of 3, which means that they stand to forfeit more than twice the capital that the RiverPark fund does should overall interest rates go on rising. Sherman is constantly buying and rolling over undervalued ultra-short junk and BBB-rated bonds and preferred shares. Many holdings are in energy, insurance, utilities and health care, which have minimal risk of defaulting. Typical investments have a 6% or higher coupon, are due to mature in a year or so, and cannot be called or refinanced.
Few of us have the knowledge to identify or buy this stuff on our own. But one drawback of these or any other boutique, research-driven portfolios is that the cost of analysts and traders falls across a small asset base; RiverPark Strategic Income has just $186 million in assets, so its expenses are 1.18%. That’s partly why the minimum to invest in several of these funds is $50,000.
But 2022 shows that managers like Sherman are worth considering when lower-cost index funds or those that hew, herd-style, to a benchmark are a recipe for 10% losses.