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Value Line’s Corporate High-Yield objective group is made up of mutual funds that invest in lower-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 include the terms 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 what agency or agencies are used to assess credit quality and the ratings in which the portfolio is focused.  That said, funds here are also allowed to 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 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 than do 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 do.

The nature of high-yield bonds lends to a broad mandate for managers and a great deal of similarity in style across most in this group.  Thus, the vast majority of funds here have eclectic portfolios that can’t be easily lumped together. 

Over the long term, the Corporate High Yield objective group has been a below-average performer relative to the broader bond market over the long term, as measured by the Barclays High Yield Bond Index.  For the 10-year period ended May 31, 2010, the group had an annualized return of 3.5%, while the Barclay’s High-Yield Index reported an annualized return of 7.7%.  Over the trailing five- and three-year periods, the group had gains of 3.1% and no change, respectively, while the Barclay’s High-Yield index reported gains of 8.0% and 6.6%, respectively.  In the trailing 12 months ended May 31, 2010, the Corporate High-Yield group reported a strong return of 20.3%, compared with an even stronger return of 28.8% for the Barclays High Yield index.  The Corporate High-Yield objective group currently has a standard deviation of 16.47.  This higher volatility reflects the turmoil that high-yield bond markets have been through in recent years.  Thus, the group has a poorer-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 May 31, 2010, the Corporate High Yield objective group has performed reasonably well, with a 2.8% return, compared to the Barclays High Yield Bond Index, which reported a 3.2% return for the same period. 

One fund with a high year-to-date return through May 31, 2010 is Blackrock High Income Fund (MDHIX).  This fund seeks a high level of current income.  As a secondary objective, the fund seeks capital appreciation.

The fund pursues its objectives by investing at least 90% of its assets, under normal market conditions, in a diversified portfolio of fixed-income securities, such as corporate bonds and notes, mortgage-backed securities, asset-backed securities, convertible securities, preferred securities, and government obligations.  Both U.S. and foreign companies and governments may issue these securities.  Up to 80% of fund assets, under normal circumstances, may be rated, at the time of purchase, below investment grade.  The fund may also invest in derivative securities for hedging purposes or to increase the return of its investments.

The fund uses a fundamentally-driven research process to overweight its investments in different industries.  As of March 31, 2010, the fund was overweight in the automotive, wireless, and chemicals sectors, and was underweighted in the technology, healthcare, and gaming segments. 

Another fund with a good relative year-to-date return is Northeast Investors Trust Fund (NTHEX).  This fund seeks to provide high current income.  Capital appreciation is a secondary objective, but its achievement must be compatible with the primary objective.

The fund pursues its objectives by investing at least 80% of its assets in debt securities that are rated below investment grade or unrated securities having similar high-yield characteristics.  The fund may also invest in convertible securities and securities with warrants attached.  Management may make use of borrowed funds in order to raise additional capital or to avoid liquidating securities for redemptions.  Leverage is limited to 25% of its assets. 

A third fund with a relatively good year-to-date return and five-year total return is Dunham High-Yield Bond Fund (DAHYX). This fund’s objective is to provide a high level of current income, with capital appreciation as a secondary goal. 

To achieve this goal, the fund normally invests at least 80% of its net assets in debt securities and convertible securities rated below investment grade, and in unrated debt securities determined to be of comparable quality. 

The fund may invest in nonincome-producing securities, including defaulted securities and common stock.  However, as of May 31, 2010, the fund had about 96% of its assets invested in bonds rated below investment grade.

In the table below, we have listed 10 top-performing funds through May 31, 2010 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 Hancock High Yield A

JHHBX 

9.74

-2.93

4.03

17.90

3.71

 

Blackrock High Yield A

BHYAX 

5.83

-3.52

2.82

9.52

6.77

 

Blackrock High Income A

MDHIX 

5.84

-3.03

3.67

9.60

6.10

Equitrust Strategic Yield A

FSYAX 

5.70

-1.13

2.69

4.99

 

J HancockIII Core High Yield A

JYIAX 

4.96

-4.14

3.05

7.73

 

Northeast Investors Trust

NTHEX 

4.83

-3.85

3.07

6.47

4.27

USAA High-Yield Opportunities

USHYX 

4.58

-4.03

1.81

7.31

6.27

Consulting Group Funds High Yield

THYUX 

4.57

-3.64

3.04

8.13

6.24

Legg Mason Partners High Income A

SHIAX 

3.69

-3.79

2.29

7.56

5.32

Dunham High Yield Bond A

DAHYX 

4.42

-2.41

2.52

6.53

 

Corporate-High Yield Objective Group

 

2.57

-2.69

1.27

4.50

3.15