Morningstar Advisor - October/November 2009 - 56

Undiscovered Managers Mark Shenkman Harbor High-Yield Bond HYFAX $13K 12 11 10 BarCap US Agg Bond first departments dedicated to buying and selling junk bonds. Internal tensions between firm co-CEOs Lewis Glucksman and Peter Peterson (see the now ironically titled Greed and Glory on Wall Street: The Fall of the House of Lehman, 1985, by Ken Aulette) made for a contentious environment, and by April 1983, Shenkman decided to jump back into the asset-management side of the business. From April 1983 to June 1985, Shenkman served as lead manager of the First Investors Fund for Income and as president and chief investment officer for the fund’s advisor, First Investors Asset Management. The fund held nearly $1.6 billion in high-yield assets relative to a total high-yield universe of $20 billion (8% of the total market), making it the largest high-yield fund in the world. It was also during this period that the high-yield marketplace expanded rapidly, largely because of Milken’s successful efforts at Drexel. According to Glenn Yago’s study Junk Bonds: How High-Yield Securities Restructured Corporate America (1991), the new-issue market for high-yield bonds had gone from effectively being nonexistent before 1977 to representing between a fourth and a third of total outstanding corporate debt in the years Shenkman ran this fund. Still, despite his prominent position at the top of one of the largest high-yield funds, Shenkman was restless. After a brief stint as an advisor to corporate acquisition specialist Ronald Perelman, he founded Shenkman Capital Management in July 1985. Setting Firm Principles Vaselkiv responded to an advertisement Shenkman placed in The New York Times for a high-yield analyst. At the time, he was working on private placements at Prudential, but he could tell that opportunities to learn about this still-young market would be greater working with Shenkman. He says that one of his first assignments in 1986 was to head out to Beverly Hills, Calif., to attend the Drexel High Yield Bond Conference, the so-called “Predator’s Ball.” And though Vaselkiv only worked for Shenkman for two years before moving to T. Rowe, he recalls that time as an intense period of learning and as good preparation for his own impressive career as a high-yield manager. Shenkman has said that the firm grew rather slowly in its first decade, which is how long it took to achieve $1 billion in assets under management, but much more important in this early period was the cultivation of a team and a culture, and the development of a set of strict investment principles, all of which would go on to serve the firm, and its investors, very well. The fundamental principle for Shenkman is his desire to protect shareholder capital from an asset class that, he argues, inherently carries a good deal of risk. While virtually all credit-oriented fixed-income sectors carry an asymmetric risk/reward profile, as the possible downside is almost always going to be greater than the upside potential, it is particularly true of the highly leveraged firms that inhabit the junk-bond universe. As a result, Shenkman has long put a premium on an intensive bottom-up research process that avoids the riskiest individual credit bets and steers clear of high default rate industries, such as airlines. Moreover, the cautious and conservative style practiced by Shenkman and inculcated into his team and its procedures also demands that the portfolios they manage need not look like specific benchmark indexes. In fact, he says that he is often frustrated by the fact that many institutional investors say that they seek a structured and disciplined investment process, yet they also expect their portfolios to Category High Yield Bond Morningstar Rating Expense Ratio (%) 0.77 5-Yr Anl Total Rtn (%) 4.76 5-Yr Anl TR % Rank Cat 15 QQQQQ Minimum Investment $1,000 Data as of Aug. 31, 2009 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Feb-05 Jul-05 Dec-05May-06Oct-06Mar-07Aug-07 Feb-08 Jul-08 Dec-08May-09 Mar-05Aug-05 Feb-06 Jul-06 Dec-06May-07Oct-07Mar-08Aug-08 Feb-09 Jul-09 Apr-05Sep-05 Mar-06Aug-06 Feb-07 Jul-07 Dec-07May-08Oct-08Mar-09Aug-09 May-05Oct-05 Apr-06Sep-06 Apr-07Sep-07 Apr-08Sep-08 Apr-09Sep-09 Jun-05Nov-05 Jun-06Nov-06 Jun-07Nov-07 Jun-08Nov-08 Jun-09 April 1979. The Fidelity offering, for which the firm raised $90 million (an astounding sum for a fund of this kind at the time), was also arguably the first fund launched with the intent of taking advantage of the nascent new-issue market in high-yield. Before, the high-yield marketplace was mostly composed of “fallen angels,” or previously investmentgrade rated firms that fell to below-investmentgrade status. Several other funds, such as Northeast Investors NTHEX, Lord Abbett Bond-Debenture LBNDX, Keystone B4, and First Investors Fund for Income FIFIX had made use of that market for fallen-angel debt and would later become early purchasers of new-issue high-yield bonds underwritten by Milken’s firm Drexel Burnham Lambert. Running on Parallel Tracks The trajectory of the high-yield bond market and the unfolding of Shenkman’s career very much ran on parallel tracks from this point. In 1979, Shenkman left Fidelity for Lehman Brothers Kuhn Loeb to co-manage one of the Shenkman set out on his own with one client and three employees, but his experience in navigating the early high-yield market, and a solid list of industry contacts, served him well. One of these early employees, Mark Vaselkiv, would later go on to become the head of the high-yield department at T. Rowe Price and manager of T. Rowe Price High-Yield PRHYX, a Morningstar Fund Analyst Pick. 56 Morningstar Advisor October/November 2009
Morningstar Advisor - October/November 2009

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