Thinking about investing in Phoenix Investment Adviser's flagship JLP Credit Opportunity Fund? Better think fast—would-be investors have until July 1 to make up their minds before the fund is soft closed.
The fund has performed well, Phoenix founder and CIO Jeff Peskind told FINalternatives during a recent phone interview, “2012 was a good year, and we're off to a really strong 2013. [W]e've grown our firm AUM to $708.3 million now.”
The problem is its shrinking universe: the JLP Credit Opportunity Fund focuses on stressed corporate bonds, particularly those trading at under 75 cents on the dollar, and “the amount of bonds that meet our criteria has shrunk because we've been in a pretty low default rate environment, or low stress environment. There's just not enough paper to buy that meets our criteria and still can give us great returns,” said Peskind.
The flagship fund is sitting at $569.4 million right now. Peskind says after July 1, existing investors will be allowed to add to their investments “as long as we can find appropriate bonds to buy from that space,” but no new investors will be accepted.
Peskind, who expects the low default rate environment to persist “for the foreseeable future,” anticipates the fund will continue to perform well and can even imagine re-opening to new investors. “There are always companies going out of favor, so I'm sure it will open at some point in the future, I just don't know when.”
For now, he says the firm is shifting some of its focus to its new JLP Institutional Credit Fund.
“That fund came about because we do some very in-depth analysis on levered companies, and in the main fund we're always buying unsecured bonds trading at 60 or 70 [cents on the dollar]. Sometimes those compelling companies have bonds that are senior in the capital structure,” said Peskind. These senior bonds—secured bonds, first-lien bonds, second-lien bonds—trade at 8 or 9%, he said, compared to on-the-run junk bonds which are currently yielding 5.5%.
“We're buying those bonds that yield 8 or 9%, and we're getting more yield on our long side. We're also hedging that book pretty aggressively, so it is much more of a long/short product. We're aiming for an 8-12% return, not a 15-20% return, like our flagship. We've actually started to get some really good traction raising assets for that fund. We started fundraising about a year ago. We were about $20 million, and today we're right around $125 million.”
The new fund is less volatile than the flagship and, as the name suggests, targets institutional investors who are “much more focused on lower draw-downs, minimal volatility, more consistent earnings,” said Peskind.
Three things distinguish Phoenix's funds from other bond funds, said Peskind. The first is their focus on “company-specific credits.”
“We can generate real alpha from picking the right bonds.”
“Number two, our size is a huge advantage because real value is in the smaller bond issues—the ETFs have sucked up all the big bond issues, and that's left some real big pricing mismatches in the smaller issues.”
Third, he said, is Phoenix’s “unique way of hedging” which is “a very low-cost way of hedging our portfolio, which a lot of other credit people don't really use. We short bonds against our long bonds but we also hedge using equities, which is different from most managers.”
The new fund's universe—bonds, loans, and converts that yield more than 7%—is “much, much, much” bigger than the flagship's: about $500 billion, Peskind estimates, and the fund has a capacity of $2 billion to $3 billion.
“We think credit is still a good place to invest if you're a small, nimble fund,” said Peskind.