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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, 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 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 July 31, 2012, the group had an annualized return of 6.8%, while the Barclay’s High-Yield index reported an annualized return of 11.2%. Over the trailing five- and three-year periods, the group had gains of 4.7% and 10.4%, respectively, while the Barclay’s High-Yield index reported gains of 10.3% and 14.7%, respectively. In the trailing 12 months ended July 31, 2012, the Corporate High-Yield group reported a return of 4.9%, compared with a better return of 8.1% 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 July 31, 2012, the Corporate High-Yield objective group has performed moderately well, with a 7.4% return, compared to the Barclays High-Yield Bond index, which reported a 9.3% return for the same period.  

One fund with a good relative year-to-date return is Invesco High Yield Sec Fund A (HYLAX). The fund’s primary investment objective is to earn a high level of current income. As a secondary objective, the Fund seeks capital appreciation but only to the extent consistent with its primary objective. Under normal circumstances, the fund will invest in a portfolio of high-yielding, high-risk bonds and other income securities, such as convertible securities and preferred stock. The fund invests at least 80% of its net assets in fixed-income securities (including zero coupon securities) rated below Baa by Moody’s Investors Service, Inc. (Moody’s) or below BBB by Standard & Poor’s Rating Group (S&P), or in non-rated securities considered by the Adviser to be appropriate investments for the fund.

In selecting securities for the fund’s portfolio, the Adviser (Invesco Advisers, Inc.) focuses on securities that it believes have favorable prospects for high current income and the possibility of growth of capital. Before purchasing securities for the fund, the adviser conducts a bottom-up fundamental analysis of an issuer that involves an evaluation by a team of credit analysts of an issuer’s financial condition. The fundamental analysis is supplemented by (i) an ongoing review of the securities’ relative value compared with other similar securities, and (ii) a top-down analysis of sector and macro-economic trends.

Management may invest up to 20% of its assets in public bank loans made by banks or other financial institutions. Public bank loans are privately negotiated loans for which information about the issuer has been made publicly available. Public bank loans are not registered under the Securities Act of 1933, as amended, and are not publicly traded. The remaining 20% of the fund’s assets may be invested in securities rated Baa or BBB or higher (or, if not rated, determined to be of comparable quality when the adviser believes that such securities may produce attractive yields). The fund can invest in derivative instruments, specifically forward currency contracts, to mitigate the risk of foreign currency exposure, and credit default swaps and credit default swap indexes, to gain or reduce exposure to an asset class or a particular issuer. 

Another fund with a high year-to-date return through July 31, 2012 is Waddell & Reed Adv High Income Fund A (NEFHX). The fund seeks to provide total return through a combination of high current income and capital appreciation. The fund seeks to achieve its objective by investing primarily in a diversified portfolio of high-yield, high-risk, fixed-income securities, including loan participations and other loan instruments (loan participations), of U.S. and foreign issuers, the risks of which are, in the judgment of Waddell & Reed Investment Management Company (WRIMCO), the fund’s investment manager, consistent with the fund’s objective.

The fund may invest in fixed-income securities of any maturity and in companies of any size. The fund invests primarily in lower-quality debt securities, which include debt securities rated BBB+ or lower by Standard and Poor’s, or comparably rated by another nationally recognized statistical rating organization (NRSRO) or, if unrated, determined by WRIMCO to be of comparable quality.

WRIMCO may look at a number of factors in selecting securities for the fund, including the economic environment, interest rate trends and industry fundamentals as well as analysis of the company’s fundamentals. After its preliminary determination to invest in securities issued by a company, WRIMCO attempts to optimize the fund’s risk/reward by investing in the debt portion of the company’s capital structure that WRIMCO believes to be most attractive, which may include secured bank loans or floating rate notes, unsecured high-yield bonds, and/or convertible securities trading well below their conversion values. 

A third fund with a relatively good return is Fidelity Advisor Hi Income Advantage Fund A (FAHDX). The fund seeks a combination of a high level of income and the potential for capital gains. The fund normally invests primarily in income-producing debt securities, preferred stocks, and convertible securities, with an emphasis on lower-quality debt securities. Management may invest in non-income producing securities, including defaulted securities and common stocks. The fund may invest up to 20% of total assets in common stocks. The fund may also invest in companies in troubled or uncertain financial condition, or in domestic and foreign issuers. 

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

Loomis Sayles High Income A

NEFHX

12.13

1.61

1.83

6.02

7.11

J Hancock High Yield Fund A

JHHBX

11.80

1.17

0.50

3.17

0.09

  

Invesco High Yield Sec Fund A

HYLAX

11.56

1.90

2.98

7.20

8.09

  

Waddell & Reed Adv High Income Fund A

UNHIX

11.34

1.59

2.52

7.85

8.65

Fidelity Adv Hi Income Advantage A

FAHDX

10.79

1.52

2.09

5.97

6.48

Transamerica High Yield Fund A

IHIYX

10.61

1.94

2.71

6.54

9.00

Invesco High Yield Fund A

AMHYX

10.33

1.93

2.47

6.28

8.29

Blackrock High Yield Bond A

BHYAX

9.52

1.82

2.25

5.54

8.27

American Beacon SiM Hi Yield Opp. A

SHOAX

10.02

1.76

2.74

4.79

  

Legg Mason West Asset GI High Yield A

SAHYX

10.25

2.35

2.10

6.18

6.57

Corporate-High Yield Objective Group

  

7.41

1.49

1.71

4.47

4.69