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Value Line’s Corporate High-Yield objective group is made up of mutual funds that invest in low-rated corporate bonds in pursuit of high current income. These bonds are often referred to as “junk,” though that name’s implications are, overall, more negative than this segment of the market deserves. Below-investment grade is another term often associated with these types of bonds. Typical names in this objective group include high-yield or high-income, though some use below-investment grade. Many funds here have a secondary objective of capital appreciation.

The term high yield is derived from the fact that investors tend to demand a higher yield as the credit quality of a debt issuer moves lower. There are several bond rating agencies that are often referenced to determine the credit quality of a bond and, thus, if a bond is appropriate for inclusion in a high-yield fund. Each agency has its own methods for rating and scoring the quality of a bond, though each has a clear demarcation between debt issued by a high-quality borrower and a lower-quality borrower. Funds will usually spell out in their prospectus which agency or agencies are used to assess credit quality. That said, funds here also invest in bonds that are not rated by any agency, assuming that the fund manager’s analysis suggests that the bond is worth owning. Some funds may hold bonds that are at the lower rungs of investment-quality debt. 

High-yield bond funds are in their own objective group because they often trade differently compared to higher-quality corporate bonds.  Indeed, factors specific to the issuing company of a high-yield bond are likely to have a larger impact on a high-yield bond’s price than interest rate changes and duration, which is not true of most bonds. This often results in high-yield bonds performing more like stocks than high-quality corporate or government debt securities.

Over the long term, the Corporate High-Yield objective group has been a below-average performer relative to the broader bond market, as measured by the Barclays High Yield Bond Index. For the 10-year period ended January 31, 2012, the group had an annualized return of 5.5%, while the Barclay’s High-Yield Index reported an annualized return of 9.5%. Over the trailing five- and three-year periods, the group had gains of 3.5% and 15.1%, respectively, while the Barclay’s High-Yield Index reported gains of 8.6% and 23.0%, respectively. In the trailing 12 months ended January 31, 2012, the Corporate High-Yield group reported a return of 2.8%, compared with a better return of 5.8% for the Barclays High-Yield Index. The Corporate High-Yield objective group has a higher-than-average Risk Rank of 4, indicating that this group might appeal to investors with greater risk tolerance. That said, investors with a longer time horizon might invest in high-yield bonds as part of a diversified portfolio. 

Year to date through January 31, 2012, the Corporate High-Yield objective group has performed moderately well, with a 2.8% return, compared to the Barclays High-Yield Bond index, which reported a 3.0% return for the same period. 

One fund with a good relative year-to-date return is J Hancock High Yield Fund A (CYBAX). This fund seeks high current income, capital appreciation is a secondary goal.

The fund normally invests at least 80% of its assets (plus any borrowings for investment purposes) in U.S. and foreign fixed-income securities rated BB/Ba or lower and their unrated equivalents. These may include, but are not limited to, domestic and foreign corporate bonds, debentures and notes, convertible securities, preferred securities and domestic and foreign government obligations. No more than 10% of the fund’s total assets may be invested in securities that, at the time of purchase, are rated in default by Standard & Poor’s (S&P) or Moody’s Investors Service (Moody’s). There is no limit on the fund’s average maturity.

In managing the fund’s portfolio, the subadviser (John Hancock Asset Management) concentrates on industry allocation and securities selection, deciding which types of industries to emphasize at a given time and then which individual securities to buy. The subadviser uses top-down analysis to determine which industries may benefit from current and future changes in the economy.

The fund may hold up to 20% of its total assets in the securities of companies in any one industry and up to 10% of its total assets in the securities of any individual issuer. The subadviser looks at the financial condition of the issuers, as well as the collateralization and other features of the securities themselves. The fund typically invests in a broad range of industries. 

Another fund with a high year-to-date return through January 31, 2012 is Loomis Sayles High Income Fund A (NEFHX). The fund seeks high current income plus the opportunity for capital appreciation to produce a high total return.

The fund typically invests at least 65% of its assets in below investment-grade U.S. corporate or U.S. dollar-denominated foreign fixed-income. Around 20% of its assets are usually in foreign currency-denominated fixed-income securities, including those in emerging markets. The adviser may elect not to hedge currency risk, which may cause the fund to incur losses that would not have been incurred had the risk been hedged. The adviser performs its own extensive credit analysis to determine the creditworthiness and potential for capital appreciation of a security.

In deciding which securities to buy and sell, the adviser will consider, among other things, the financial strength of the issuer, current interest rates, current valuations, the adviser’s expectations regarding future changes in interest rates and comparisons of the level of risk associated with particular investments. The adviser employs a selection strategy that focuses on a value-driven, bottom-up approach to identify securities that provide an opportunity for both generous yields and capital appreciation. 

The adviser emphasizes in-depth credit analysis, appreciation potential and diversification in its bond selection. Each bond is evaluated to assess the ability of its issuer to pay interest and, ultimately, principal (which helps the Fund generate an ongoing flow of income). The adviser also assesses a bond’s relation to market conditions within its industry and favors bonds whose prices may benefit from positive business developments. The adviser seeks to diversify the fund’s holdings to reduce the inherent risk in below investment-grade fixed-income securities. In connection with its principal investment strategies, the fund may also invest in structured notes, zero-coupon securities, pay-in-kind securities, Rule 144A securities, futures and swaps (including credit default swaps).

A third fund with a relatively good return is Rydex High Yield Strategy Fund A (RYHDX). It seeks to provide investment results that correlate, before fees and expenses, to the performance of the high-yield bond market.

The Advisor (Security Investors, LLC, which operates under the name Rydex Investments) will consider the liquidity, transaction costs and relative value of available investments in seeking to meet the fund’s investment objective. The fund will primarily invest in credit default swaps to gain exposure similar to the high-yield bond market. Credit default swaps are instruments, which allow for the full or partial transfer of third party credit risk, with respect to a particular entity or entities, from one counterparty to another. A buyer of credit default swaps is purchasing credit protection or mitigating credit risk. A seller of credit default swaps is divesting credit protection or assuming credit risk.

The fund will normally be a seller of credit protection (assuming credit risk) as it seeks to gain exposure to the high yield bond market, but may also buy credit protection during times of heavy redemption activity in order to maintain the appropriate level of exposure to the high-yield bond market. In addition, the fund may invest in bond futures for the purpose of managing duration risk. The fund is non-diversified and, therefore, may invest a greater percentage of its assets in a particular issuer in comparison to a diversified fund. 

In the table below, we have listed 10 top-performing funds through January 31, 2012 that we follow in our Fund Advisor database.

 

10 Top Corporate-High Yield Funds Performance

 

Fund Name

Ticker

% Year-to-date

Total Return

% 1 Month

Total

Return

% 3

Month

Total

Return

% 6 Month

Total

Return

% 5 Year

Total

Return

Annualized

J Hancock3 Core High Yield Fund A

JYIAX

8.37

8.37

5.24

-3.13

  

Loomis Sayles High Income A

NEFHX

5.77

5.77

4.56

-2.57

5.30

  

Rydex High Yield Strategy A

RYHDX

5.36

5.36

4.47

4.05

 

  

Pioneer High Yield A

TAHYX

5.39

5.39

4.47

-0.91

4.05

BlackRock High Yield Bond A

BHYAX

3.77

3.77

4.29

1.51

6.74

American Beacon SiM Hi Yld Opp A

SHOAX

4.99

4.99

4.46

2.15

 

Fidelity Adv Hi Income Advantage A

FAHDX

4.54

4.54

3.94

-1.11

5.02

Mainstay 130/30 High Yield A

MYHAX

4.48

4.48

2.97

-0.03

 

PIMCO High Yield Spectrum A

PHSAX

4.19

4.19

3.59

1.17

  

Fidelity Capital and Income

FAGIX

4.19

4.19

2.83

-2.55

7.58

Corporate-High Yield Objective Group

  

2.82

2.82

2.78

0.45

3.45