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A Broader Sweep in Capital Structure
Transamerica Strategic High Income Fund
Interview with: William Bellamy

Author: Ticker Magazine
Last Update: Jul 27, 9:54 AM ET
Combining stocks and bonds, investors can benefit from increasing values in equities and downside protection on the back of fixed-income securities. With this broad investing approach, William Bellamy, portfolio manager of the Transamerica Strategic High Income Fund, looks for opportunities across the entire corporate capital structure of companies with the objective to generate steadier returns and fend off volatility.

ďBy investing across the entire corporate capital structure, from common equity to preferred stocks to the corporate debt, we determined the fund could generate high current income but with much lower volatility.Ē
Q: Would you give an overview of the fund?

A: The Transamerica Strategic High Income Fund was launched in March 3, 2014. Thompson, Siegel & Walmsley LLC (TSW) is our sub-adviser.

In the aftermath of the 2008 crisis, investors approached us seeking lower volatility, more downside protection to the equity market, and higher income generation, which prompted the genesis of this strategy.

Because TSW manages both equity and credit, we believed these objectives could be achieved by investing across the entire corporate capital structure, from common equity to preferreds to the corporate debt of the companies we analyze. By combining these three asset classes, we determined the fund could generate high current income but with much lower volatility.

We move between these asset classes based on relative value while continually holding true to our primary income objective. The fundís gross current yield is just over 5%, and today approximately 57% of the asset is invested in common equities, 35% in high-yield credit, and 8% in preferred stocks.

The fundís assets under management are about $139 million and additional $60 million managed outside of the fund, for a total of $200 million in the strategy.

Q: What is the objective of the fund?

A: Income is our primary objective, followed by strong risk-adjusted returns derived from selecting securities which will perform well within the portfolio. Managing income at the portfolio level grants us the ability to actually hold non-dividend paying equities and make up for their dearth of income in the high-yield and preferred spaces.

The management of both equity and credit under one roof is a key differentiator of the fund, as it gives the portfolio management team the ability to toggle between dividend-paying equities, high-yield bonds, and preferred stocks. This allows us to actually choose which part of a companyís capital structure to invest in.

If we think an equity is fully valued with little upside, we would look at its preferred equity or high-yield debt. Regardless of whether we are considering an equity or credit investment, we feel that balance sheet analysis plays an important role.

Q: How do you define your investment philosophy?

A: Leonardo da Vinci has been credited with saying ďSimplicity is the ultimate sophistication,Ē and we truly believe in that statement. The marketplace has become quite sophisticated over the last 10 years, but we believe keeping this product extremely simple and understandable is the best way to serve our clients.

Income can be derived in many ways, and often involves derivatives and leverage Ė two things we donít do. The income generated within this fund is quite organic and most of our names are recognizable.

Itís crucial that our clients understand what we are doing in a granular fashion. This is why we stay true to the corporate capital structure of primarily domestic companies Ė the fund doesnít invest in residential or commercial mortgage-backed securities, or in emerging market debt.

Q: What is your investment process?

A: Our investment process comprises our macro view, strategic allocation among our three sleeves, and fundamental analysis on every name that goes into the portfolio.

We begin by determining how much risk we want to take given our current macroeconomic view. Determining where we are in the economic cycle helps us determine the fundís weightings.

Strategic allocation starts by deciding where we want to be from an equity standpoint, and then the balance of the portfolio is filled with high-yield and preferreds based on the relative value between them. If we see better value in high yield, the weight of preferreds may actually be zero.

Next comes security selection, where we are truly fundamental investors. We prefer to invest in companies that are cheap on a cash-flow basis and have positive catalysts that are sustainable over long periods.

Our focus on cash flow also holds true on the credit side. When investing in a companyís credit, we prefer it have positive cash flow, moderate leverage, and strong interest coverage and asset coverage ratios. We are biased toward higher-quality, high-yield bonds, and look most closely at the B and BB space because CCC-rated bonds have far less attractive risk-adjusted returns.

Lastly, because the fundís primary objective is income, we look at income at the portfolio level, where we can make up for the loss of income from non-dividend paying investments through allocations to credit and preferreds. Owning equities without dividend yields allows that sleeve of the portfolio to have a much higher beta than traditional income-oriented products. While income is the fundís primary objective, holding equities that donít pay dividends means we are also concerned with total return, albeit at a secondary level.

Q: How do you go about your research process?

A: To narrow the investment universe, we use a four-factor screen which identifies companies that are cheap on a cash flow basis with sustainable catalysts.

On the equity side, our fundamental analysis revolves around sustainable and growing cash flows. It is very beneficial when management teams come through our office. We can ask them pointed questions concerning their balance sheet and credit metrics, questions they would not expect from an equity-only shop. Again, it really plays into the benefit of us managing both bonds and stocks under one roof.

Additionally, we have a broad array of relationships on the Street, so sell-side research comes in quite frequently. Thatís more informational in nature Ė on an industry or particular companies. Decisions about whether a company is investable or not are made internally.

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