US Middle Market High Yield Strategy

US Middle Market High Yield Strategy

US Middle Market High Yield Strategy


The US Middle Market High Yield Strategy is a value-oriented fixed income strategy that seeks to maximize total returns from income and price appreciation by investing in a diversified portfolio of U.S.-denominated debt issued by corporations and non-government issuers, with a focus on middle market credits, with less than $1 billion of total bonds outstanding. To help achieve this objective, the strategy uses a bottom-up, credit intensive approach that looks for relative value opportunities, integrated with top-down macro analysis.

Investment Approach

The team aims to take advantage of pricing inefficiencies in the market, which would potentially provide them with the opportunity to earn superior returns. The team believes that the market may misunderstand and misprice the credit quality of certain high yield issuers, and in particular their default risk. Their fundamental, value-driven approach to investing gives them the ability to identify and take advantage of these situations. The team’s philosophy and fundamental style have not changed since the inception of the strategy.

The team believes that by using a disciplined and diversified approach, investing in the middle market segment in the U.S. can potentially provide investors with increased yields with limited volatility throughout market cycles and less duration risk than the broader high yield market. 

Middle market issuers generally receive less scrutiny from market participants including credit rating agencies, underwriters and asset managers. The team believes one of the most attractive features of middle market bonds is derived from an investment manager’s ability to use diligent fundamental research to identify issuers with the strongest credit metrics and then look to benefit from the additional yield they can provide.


Focus on Middle-Market Issuers:

With its focus on middle market issuers, the Strategy offers a highly differentiated return profile relative to the broader high yield market and has historically generated attractive returns.

Extensive Experience in Managing High Yield Bonds:

With track records dating back to the early 1980s, the MSIM High Yield team is one of the longest tenured high-yield managers.

Global approach and perspective:

The MSIM High Yield team is one of the few managers with a truly global high yield capability with team members in New York, Boston, London, and Toronto.

Structured Approach:

Our approach to high yield investing concentrates on generating returns through bottom-up security selection, but overlays this with a top-down macroeconomic and valuation framework to control overall risk appetite and sector selection.

Investment Process
Macro Analysis:

In order to determine the optimal positioning of the high yield portfolio, the process begins with a top-down, macroeconomic value assessment of the corporate bond universe, including a consideration of macroeconomic conditions, the corporate earnings environment, relative valuations and expectations of future default rates. Sector positioning results from the team's view on the economic cycle and is intended to allow them to focus on those industry sectors that they feel should do best given where they are in the cycle. Sector rotation generally takes place as their view of the economic cycle changes. Input from the Macro and Asset Allocation teams is useful in developing their assessment of broad economic conditions.


The key to the portfolio management process is intensive fundamental credit research. Portfolio managers work closely with the credit analysts to generate new investment ideas and ensure continual monitoring of the credit quality of existing portfolio holdings. The team views the allocation to ratings as inherent to the fundamental credit analysis because they feel that middle market credits may have ratings that do not properly reflect their true credit quality. The team analyzes the company’s financial statements in an effort to understand whether its capital structure is suitable for the risk entailed in its business. A final key part of the analysis is to understand management’s intentions, in terms of business development and capital structure, and their ability to execute their plans.

Portfolio Construction:

A portfolio is constructed with sector allocation driven primarily from bottom-up security selection (subject to risk management guidelines) with focus on middle market credits, with $150 million to $1 billion of total debt outstanding with 80-85% of the portfolio invested in middle market issuers and 15-20% invested in the top 100 largest high yield issuers.  The team will also strive for the portfolio to be well-diversified at issuer and industry levels.

Portfolio Monitoring:

The team continually monitors existing holdings to verify that our clients consistently benefit from our best investment ideas. The credit research teams have regular daily and weekly meetings in which opinions and ideas from all members are debated to ensure that portfolios reflect their best ideas. In addition to these formal meetings, there is constant daily dialogue. Internal debate is a key feature of our investing philosophy, ensuring investment ideas are tested thoroughly. Integral to the team’s portfolio construction process is the measurement and monitoring of market risk, duration and volatility, and credit risk.

Risk Management:

The team views risk management as an integral part of our investment process. Based on this belief, they seek to protect their portfolios from a variety of risks through diversification, credit risk protection and liquidity. The goal is to ensure that portfolios are well balanced and that no single risk dominates the portfolio. In addition to powerful modelling systems with in-depth analysis to manage risks, the team uses a variety of controls to manage and monitor risks in clients' portfolios. Additionally, we are able to code the investment guidelines into the Blackrock Aladdin system for each portfolio we manage. This helps ensure that portfolios are run appropriately and that the Compliance and Risk Departments are able to monitor effectively.

US high yield investment process
Portfolio Managers  
Jack Cimarosa
Managing Director
19 years industry experience
Joseph Hurley
Executive Director
20 years industry experience


There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and that the value of Portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. High yield securities (“junk bonds”) are lower rated securities that may have a higher degree of credit and liquidity risk. Public bank loans are subject to liquidity risk and the credit risks of lower rated securities. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Distressed and defaulted securities are speculative and involve substantial risks in addition to the risks of investing in junk bonds. The Portfolio will generally not receive interest payments on the distressed securities and the principal may also be at risk. These securities may present a substantial risk of default or may be in default at the time of investment, requiring the portfolio to incur additional costs. Preferred securities are subject to interest rate risk and generally decreases in value if interest rates rise and increase in value if interest rates fall. Mezzanine investments are subordinated debt securities, thus they carry the risk that the issuer will not be able to meet its obligations and they may lose value. Foreign securities are subject to currency, political, economic and market risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. In general, equity securities' values also fluctuate in response to activities specific to a company. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk).

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.


The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The Bloomberg U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below. The Index excludes emerging market debt. The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

“Bloomberg®” and the Bloomberg Index/Indices used are service marks of Bloomberg Finance L.P. and its affiliates, and have been licensed for use for certain purposes by Morgan Stanley Investment Management (MSIM). Bloomberg is not affiliated with MSIM, does not approve, endorse, review, or recommend any product, and. does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any product.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.


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