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David Breazzano

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2024-09-12
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2024-09-12
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  1. “Essentially, we're looking for higher growth, lower CapEx businesses. So businesses that are throwing off a healthy amount of cash flow, but really what we're trying to do is avoid secularly challenged businesses. What Amazon has done to traditional brick and mortar retailers. And then that translates into shopping malls and so forth where you go through a traditional shopping mall that was vibrant 10, 20 years ago. And today it's a ghost town. So we want to avoid those secularly challenged businesses where there's often a fertile ground for high yield investing and what we do is the private equity transactions where the PE firms identify businesses that, in their opinion, are high growth.”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “Get at this opportunity set of finding the higher yield securities that don't have as much of a risk of default. What are the characteristics you look for within that universe to find the most attractive bonds?”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “So that leads one to conclude that, well, wouldn't it make sense to try to construct portfolios with the highest yield possible without jeopardizing the principal? And if one can do that, you would outperform others that don't necessarily do that. So if we have portfolios that have a significant yield advantage over the index or the market or our competitors and can contain the negative credit events, the default losses or price declines to be equal or less than the broader market, then you capture that yield spread essentially for free and the compounding effect of that spread is significant over time.”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “On those bonds. It's not buying a bond at 90 and selling it at par and making those 10 points. There is some price action that certainly is involved, and there's some negative price action if there is a default. The price will decline. But people often overlook that positives happen in high yield as well. A company can take out the bond prior to maturity and pay a call premium, and that's several points of additional profit that offsets any losses. Companies can get upgraded. They can go from single B to double B to triple B and the spread compresses and the price goes up. So there are positive aspects that offset some of the negative aspects. So when one factors all that together, you observe that well north of 95% of the return profile in the high yield market is the yield.”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “And if the assets have a value greater than zero, you are entitled to it. And in fact, the recovery rate is in the 40s. So if you look at a default rate of 3, 4%, and if you get close to half your money back afterwards, your loss is like 2%. And if you have a spread significantly higher than that, you're going to outperform other asset classes. I spent probably the early part of my career just developing narratives to dispel the myths and to get people to actually focus on the facts. And even today, that continues because our belief is if one looks at the data and looks at the return profile of, say, the high yield index, the vast majority of the returns generated over time is a function of the yield or the coupon.”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “Yeah, very good question. So first, I recognize that the market was surrounded by misperceptions. There was this belief that junk bonds, the vast majority of them defaulted and would end up as worthless securities. So that was the myth. I remember asking people, what do you think the annual default rate is for high yield bonds? And people would say, oh, 30, 40, 50% a year. And I said, what if I told you it was 3 or 4% a year? And they go, oh, that can't be. I go, but that's what it is. And if you look at the yield premium that one gets at the time, it more than compensated for that risk. And then take it one step further. When a bond defaults, what do you think it's worth? And I said, well, zero. And I go, well, it really isn't because you have a claim against the assets of that company ahead of the shareholder.”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “Big firms develop larger high yield funds and they couldn't participate in some of the smaller, more traditional high yield deals. I saw an opportunity in the mid and small cap space that was being vacated as larger deals began to dominate the market. Now all CCCs are not opportunities. In fact, we believe most of them are not good, but we believe that a certain percentage, 10, 15% of CCC universe could be real opportunity because of the bias against considering them as viable investments. Those are the areas that we can exploit if we were managing a smaller pool of capital. So that led to the creation of my firm DDJ Capital Management, which about two and a half years ago was acquired by Poland Capital.”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “out of business school a couple of years and i saw an opportunity in a pretty exciting nascent market that i think had a lot of potential so i could get in early as a pioneer”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “Viewed as a pariah type investment class. respectable people went into equities or investment grade debt and it was more of the fringe players that went into high yield and that's what attracted me I was young”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “Buy side shop in the world, a firm called First Investors, where we managed over a billion dollars when the high yield market was maybe 20 or 30 billion in size.”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “to see you ted. I'd love you to take me back from your early start in these markets and describe a little bit of your path and a little bit what the markets were like and how yield once you got started.”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “My guest on today's sponsored insight is Dave Brazano, head of the credit team at Poland Capital, where he oversees eight billion of the firm's forty three billion dollars in assets. Dave is one of the OGs in high yield. Having started in the early 1980s and invested continuously through more than 40 years since. Our conversation covers some history of the high-yield market alongside Dave's involvement in it, the founding of his firm in 1996, Poland's strategy to take advantage of myths in the market, the implementation of the strategy, and Dave's thoughts on the changing interest rate environment, private credit, and opportunities and risks going forward. In our complex world of investing, I suspect you'll find an elegance in the simplicity and clarity with which Dave approaches investing. Before we get going, in recent”

    2024-09-12 · Capital Allocators · David Breazzano - High Yields and Low Risk at Polen Capital (EP.405) · IDENTIFIED FROM THE TRANSCRIPT · source