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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 November 30, 2012, the group had an annualized return of 6.7%, while the Barclay’s High-Yield index reported an annualized return of 11.0%. Over the trailing five- and three-year periods, the group had gains of 5.3% and 9.1%, respectively, while the Barclay’s High-Yield index reported gains of 10.7% and 12.5%, respectively. In the trailing 12 months ended November 30, 2012, the Corporate High-Yield group reported a return of 13.4%, compared with a better return of 17.0% 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 November 30, 2012, the Corporate High-Yield objective group has performed moderately well, with a 11.3% return, compared to the Barclays High-Yield Bond index, which reported a 14.0% return for the same period. 

One fund with a good relative year-to-date return is Loomis Sayles High Income Fund A (NEFHX). The fund’s primary investment objective is high current income plus capital appreciation for a high total return.

Under normal market conditions, the fund will invest at least 65% of its assets in below-investment-grade fixed-income securities. It may also invest up to 20% of its assets in foreign currency-denominated fixed-income securities. Such securities may also include Rule 144A securities, which are subject to resale restrictions.

As of September 29, 2012, the fund had 54% of its assets in high-yield bonds, 11% in convertible bonds, 18% in cash and currency, 6% in mortgage-backed securities, and 11% in other.  

Another fund with a high year-to-date return through July 31, 2012 is John Hancock High Yield Fund A (JHHBX). This fund seeks high current income. Capital appreciation is a secondary goal. 

The fund pursues its objectives by investing at least 80% of its assets 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, notes, convertible securities, preferred stocks, and domestic and foreign government obligations. No more than 10% of total assets may be invested in securities that are in default. There is no limit on the fund’s average maturity.

As of October 31, 2012, the fund held 71% of its assets in high-yield bonds, 6% in convertible bonds and stocks, 6% in cash, and 17% in other.

A third fund with a relatively good year-to-date return and five-year total return is Blackrock High Yield Bond Portfolio Fund (BHYAX). This fund’s objective is maximum total return, consistent with income generation and prudent investment management.

To achieve this goal, the fund normally invests at least 80% of its net assets in high-yield non-investment grade securities with maturities of 10 years or less. To add additional diversification, including bonds rated below investment grade, convertible securities, and preferred stocks. The fund’s strategy is to position the portfolio in sectors with attractive returns and reasonable margins of safety. It seeks issues that may be overlooked by investors, which have attractive return potential relative to the perceived risks.

As of October 31, 2012, the fund held 79% of its assets in high-yield bonds, 4% in convertible bonds and stocks, 2% in cash, and 15% in other.

In the table below, we have listed 10 top-performing funds through November 30, 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

Loomis Sayles High Income A

NEFHX

18.06

1.05

5.29

7.22

7.19

J Hancock High Yield Fund A

JHHBX

20.63

2.23

7.89

8.43

1.14

  

Invesco High Yield Sec Fund A

HYLAX

15.90

1.12

3.89

6.98

8.06

  

Waddell & Reed Adv High Income Fund A

UNHIX

15.66

0.83

3.88

6.50

8.64

Mainstay High Yield Opportunity A

MYHAX

15.55

1.51

5.01

6.50

  

Nuveen High Income A

FJSIX

15.01

1.22

4.68

5.99

6.27

UBS PACE High Yield A

PHIAX

14.85

1.38

4.71

6.67

9.74

Delaware High Yield Opportunities A

  

DHOAX

14.74

0.33

4.27

6.20

7.98

PIMCO High Yield Spectrum A

PHSAX

14.74

1.04

4.17

6.43

  

BlackRock High Yield Bond A

BHYAX

13.61

1.00

3.73

6.07

8.25

Corporate-High Yield Objective Group

  

10.67

0.70

3.03

4.79

4.67

  

At the time of this article's writing, the authors did not have positions in any of the fund's mentioned.