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The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.
US Outstanding Nonfinancial Bonds by Credit Quality
Through November 13, 2018
Source: Bloomberg Barclays
Low debt: Start by focusing on companies with healthy balance sheets. Look for companies that have low debt-to-EBITDA ratios. Today, just over half the companies in the index have a lower debt/EBITDA ratio than the benchmark’s 1.75x (Display).
Through October 31, 2018
*Cap-weighted, quarterly, trailing 12-month aggregate ratio for the index. EBITDA is earnings before interest, tax, depreciation and amortization.
Source: FactSet, S&P and AllianceBernstein (AB)
Self-funding profitability: Companies with low leverage and high levels of profitability are relatively resilient to the whims of market funding. When funding costs rise—or the funding window closes—their operations should not be affected because they don’t rely on the market to pay their bills or invest in expansion. We believe return on assets (ROA) is a reliable measure of profitability. Companies whose ROA exceeds asset growth are self-funding. These companies should be able to reward shareholders by returning surplus cash as dividends or in share buybacks, even in a more challenging market.
Low cyclicality: Consistently high profitability tells you a lot about a company’s business. Growth rates can vary dramatically for most companies through the macroeconomic cycle. But businesses that can maintain long-term profitability typically have profit models capable of performing well regardless of the macroeconomic backdrop. Companies with commodity-like businesses, such as banks or materials, often apply leverage to boost ROA from chronically low levels. Differentiated and defensible businesses with high ROA—and low leverage—can typically be found in sectors such as healthcare and technology, and parts of the consumer sectors.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.
John started his career as a quantitative analyst at AB in 1988 and returned to the firm in 2006. Both times he was drawn to AB’s culture of intellectual curiosity and drive to win for its clients.
John’s investment philosophy centers on process. A striving to better understand and coalesce around research insights means that managers can stick to their guns when faced with headwinds rather than react to a point in the economic cycle.
Active management allows for this approach “Going with the flow has never worked as far as differentiating yourself,” John says. “At every level, AB’s culture supports us staying true to our convictions.”