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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 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, therefore, 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 prospectuses which 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 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 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.

The nature of high-yield bonds lends to a broad mandate for managers and a great deal of similarity in style across most funds 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, as measured by the Barclays High Yield Bond index. For the 10-year period ended February 28, 2013, the group had an annualized return of 6.6%, while the Barclay’s High-Yield index reported an annualized return of 10.7%. Over the trailing five- and three-year periods, the group had gains of 6.6% and 9.0%, respectively, while the Barclay’s High-Yield index reported gains of 12.0% and 12.0%, respectively. In the trailing 12 months ended February 28, 2013, the Corporate High-Yield group reported a return of 9.3%, compared with a better return of 11.8% 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. 

Fund Name: Pioneer High Yield Fund
Ticker: TAHYX
Year-to-Date Return: 3.21%
Objective: Total return, with a focus on current income
Investment Strategy:
• 80% of assets in below-investment grade debt securities and preferred stocks. Investments in derivative securities may also be used for the purposes of satisfying the 80% requirement.
• Up to 20% of assets in inverse floating rate obligations, a type of derivative instrument.
• Up to 20% in common stock and other equity investments.
• Up to 15% in equity and debt securities of non-U.S. issuers.

Fund Name: Federated High Yield Trust Fund
Ticker: FHYTX
Year-to-Date Return: 2.99%
Objective: High current income
Investment Strategy:
• 80% of net assets in a diversified portfolio of high-yield, lower-rated domestic corporate bonds
• May invest a portion of assets in loan instruments and foreign fixed-income securities.
• May also opportunistically invest in convertible securities, equity securities, derivatives, pooled vehicles such as exchange-traded funds, or other investment companies in order to gain broad exposure to the equity market.

Fund Name: Aegis High Yield Fund A
Ticker: AHYAX
Year-to-Date Return: 2.89%
Objective: Maximum total return with an emphasis on high current income.
Investment Strategy:
• At least 80% of its net assets in high-yield fixed-income securities, including debt securities and preferred stocks.
• May include high-yield fixed-income securities of former blue chip companies that are attempting to recover from business setbacks or a cyclical downturn.
• Up to 20% of assets may be invested in common stocks, warrants, investment-grade bonds, currency exchange contracts, and options on securities.
• May invest in securities in default or bankruptcy when it is believed that such securities are undervalued and have the potential for capital appreciation.

In the table below, we have listed 10 top-performing funds through February 28, 2013 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

Virtus High Yield A

PHCHX

1.80

0.44

3.45

6.81

7.29

American Beacon SiM Hi Yld Opp A

SHOAX

3.24

0.85

5.46

10.46

 

  

Pioneer High Yield A

TAHYX

3.21

0.10

4.33

7.13

7.28

  

J Hancock High Yield A

JHHBX

2.96

0.55

6.35

12.11

5.24

Federated High Yield

FHYTX

2.99

0.77

4.57

7.43

10.84

Ageis High Yield

AHYFX

2.89

-0.05

4.05

5.17

9.16

Waddell & Reed Adv High Income A

UNHIX

2.78

0.90

5.02

9.17

10.93

JHancock2 High Yield

  

JIHDX

2.81

0.74

4.77

8.53

10.82

Loomis Sayles High Income A

NEFHX

2.73

0.22

5.02

9.39

9.02

Western Asset High Income A

SHIAX

2.56

0.53

4.48

8.14

10.23

Corporate-High Yield Objective Group

  

1.56

0.34

2.81

5.40

6.63

  

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