Henry Song, CFA, is Portfolio Manager of Diamond Hill Capital Management, Inc. He is Portfolio Manager of the Diamond Hill Short Duration Total Return and Core Bond strategies. He has been with Diamond Hill since 2016. Before that, he was a portfolio manager with JPMorgan Asset Management.
In this 3,408 word interview, Mr. Song describes the demand for his product:
“When we launched the strategy in 2016, it became a great solution for people looking for income in a rising rate environment. These shorter-duration investments have worked out well for clients who have invested in the strategy, and we don’t see any competing strategies out there with as much emphasis on short-duration structured product.”
One method for increasing short term returns safely was nonrated bonds:
“In my view, bonds that are not rated aren’t necessarily poor credit. This status is just the nature of assets being securitized. For example, some assets tend to be short duration in nature. By the time the issuer goes through the rating process, most of the loans will be paid off.
It is not necessarily cost-efficient for the issuer to get a rating for the bonds. By going to the nonrated space, the issuer ends up saving money, and they are able to pass on a lot of the savings to buyers like us. It is a win-win for everyone.
Obviously, we are cognizant of the amount of nonrated securities in the portfolio because often it can be perceived as being illiquid, which is not necessarily the case.
Typically, these nonrated bonds are done on a club basis whereby only a few large investors are shown the bond and the bond gets placed with one of them. We were able to get a seat at the table because of some of the relationships I have built over the years.
The sector actually trades extremely well in the secondary market. A lot of the dealers make two-way markets on a daily basis for these bonds. They are no less liquid than anything else out there, but they are still perceived as a potential risk.
Therefore, we cap our below-investment-grade and nonrated exposure to 20% and manage to that exposure level.”
Get the rest of the portfolio structure and Henry Song’s investing philosophy by reading the entire 3,408 word interview, only in the Wall Street Transcript.
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