March 17, 2009
But, of course, defaults cannot be ignored. As of the end of February, the high-yield default rate was 6.42%, following rates of 4.96%, 4.02%, and 3.15% in January, December, and November, respectively. Standard & Poor’s estimates the default rate could top 13.9% by the end of 2009.
That’s still a lot less than the default rate priced into the market today, but default risk is not the only barrier between advisors and the elusive 20% return.
Actively managed funds
High yield investors can choose from actively managed funds and ETFs. But each choice poses problems for the advisor.
Below is a sample of some of the actively managed high yield funds.
Symbol |
Fund |
Expense Ratio |
Yield to Maturity |
| AHYVX | AMERICAN CENTURY HIGH YIELD | 1.05 |
9.53% |
CPHYX |
PRINCIPAL HIGH YIELD FUND |
.53 |
13.69%(1) |
GSHAX |
GOLDMAN SACHS HIGH YIELD FUND |
1.07 |
9.80% |
HYFAX |
HARBOR HIGH YIELD BOND FUND |
.77 |
11.13%(2) |
LHYAX |
LORD ABBETT FUND |
1.23 |
15.30%(1) |
MHCAX |
MAINSTAY HIGH YIELD CORPORATE BOND |
1.07 |
9.76% |
NEFHX |
LOOMIS SAYLES HIGH INCOME |
1.15 |
12.03% |
NTHEX |
NORTHEAST INVESTORS TRUST |
.68 |
20.19%(1) |
OHYAX |
JP MORGAN HIGH YIELD BOND FUND |
1.12 |
16.10% |
PHDAX |
PIMCO HIGH YIELD FUND |
.90 |
(3) |
PRHYX |
TROWE PRICE HIGH YIELD FUND |
.76 |
11.38% |
(1)
As of 2/28/09
(2)
As of 12/31/08; All others are as of 3/11/09
(3)
PIMCO does not quote the yield to maturity on this fund
The yields of actively managed funds trail the elusive 20% mark by at least 400 basis points (except for the beleaguered Northeast fund – see here). Some trail by more than 1,000 basis points. Expense ratios that can exceed 1 percent contribute to this discrepancy, but the actively managed nature of these funds is a bigger culprit. Managers seek higher risk-adjusted returns by selecting better-quality issuers and shorter maturities, or by holding cash, convertible bonds or preferred stocks – all of which reduce the yield of their funds.
On top of this, actively managed funds often have high turnover – 50% or more.
A word of caution is in order here. When choosing among these funds, advisors need to obtain the average yield to maturity for a portfolio and not rely on two more common – but misleading – metrics. Yield to maturity is markedly different from both the 30-day SEC yield (a nearly useless metric that resembles the “current” yield) and the trailing 12 month yield published by Morningstar (which measures prior performance and not the current holdings in the portfolio).
Mike Weldon, Lord Abbett’s director of retail marketing, shared our concerns about fund evaluation. “Financial advisors considering high yield funds, especially in this credit environment, should focus on two criteria,” he said. “Depth and experience of the management team, because credit analysis will be extremely important in selecting the credits with attractive potential and if defaults increase, and proper spread of risk in the fund. Not all high yield funds are created equal so it is important to determine the fund’s construction among issues and sectors.”
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