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| > Features > Undiscovered Managers |
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| Mark Shenkman, Harbor High-Yield Bond |
| by
Lawrence Jones
| 10-12-09 |
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The critical turning point in Mark Shenkman's investment career came in 1976, during a meeting at the Boston headquarters of Fidelity Management and Research Co. Shenkman had been working at Fidelity as an equity research analyst and co-portfolio manager since 1973. At this meeting, however, a guest from outside the firm had been invited to speak about a very new and dynamic asset class: high-yield bonds. The speaker that morning was Michael Milken, later known as the "junk bond king." Milken would do more than any single person to develop the modern high-yield bond market and would famously fall from grace at the height of his career. But at that meeting, converting one person to the high-yield fold was enough of an accomplishment.
Shenkman recalls that few within Fidelity at the time had any interest in this newly evolving asset class, but he was captivated by Milken's arguments for the highly attractive risk/reward characteristics that low-rated "junk" debt could deliver to investors. The idea of being part of a pioneering new effort also excited him. "I realized that it was very difficult to differentiate oneself in the highly competitive landscape of equity analysis or portfolio management," Shenkman says, "but becoming involved in a new niche market offered extraordinary possibilities."
As a result, Shenkman and Fidelity launched the firm's first high-yield mutual fund in November 1977, Fidelity Aggressive Income, which would later merge into Fidelity Capital & Income FAGIX. Shenkman served as the fund's first manager and led it until 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 investment-grade rated firms that fell to below-investment-grade 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 comanage one of the 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
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.
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.
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