Bloomberg recently contacted Cardan Capital Partners co-founder Matt Papazian to discuss investors’ challenge to separate trash from junk bonds.
From the report:
“For investors struggling to separate the trash from junk bonds, fund provider WisdomTree Investments Inc. swears by one simple test.
“The New York-based manager of more than $38 billion in U.S. exchange-traded funds relies almost entirely on the ratio of a company’s free cash flow versus equity to determine which bonds to buy through a new high-yield ETF. By deploying the strategy, investors could avoid roughly 90 percent of the speculative-grade debt that becomes distressed, the company’s research shows.
“It’s the latest application of an investment style that has swept the world of equities while barely denting credit — smart beta. The idea is to tweak and tune passive investing vehicles in the hope of optimizing returns.”
Also from the report:
“Smart beta is the popular thing of the moment,” said Matt Papazian, chief investment officer at Cardan Capital Partners in Denver, which owns about $7.6 million of a smart-beta junk ETF managed by PowerShares. Papazian bought that fund because it “mutes some of the volatility that comes from simply owning high-yield as an asset class.”
The full report is here.