Fund Commentary with Steve Schoepke
"Partial" to High Yield Bond Funds (Part 1)
I've always been partial to High Yield Bond funds, and so far this year, the market has been kind to investors with similarly attached to them. The Lipper High Current Yield Bond Index has returned 23.2% for the year-to-date, which makes it the best performing of the fixed-income categories. But at the on-set, I must state that my interest in high- yield bond funds has less to do with its total returns, although I wouldn't turn them away. No, the attraction for me has always been their relatively higher dividend income or yield. Vanguard's High Yield Corporate Bond Fund, yielding 9.1 percent, for example, yields considerably more than the less risky Vanguard Total Return Bond Fund Index, yielding 3.9 percent.
There are, however, other reasons for my attraction to high-yield bond funds. First, some history.
Fixed-income or bond funds came to the forefront for retail investors in the early- to mid-1980s when interest rates were at double-digit levels - at that time, my first mortgage was close to 13% and that was a 5-year ARM. The bond fund segment of the mutual fund industry built their portfolios and sales pitches around high-yield distributions. This helped assets in these types of funds grow by attracting 'roll-over' money from maturing bank CDs. It also prompted regulations to standardize mutual fund yield calculations and disclosure, which stands to this day. As interest rates declined later in the 80's, the total return for bond funds, and particularly high-yield ("junk bond" funds as they were known then) sky-rocketed, giving investors the best of all worlds.
Then, the bond fund market, and the high-yield bond fund rally in particular, took a hit as the decade closed. Manipulation of the junk bond market was proven in the courts and as a result, the sector lost some of its luster for investors. But what remained, not only for high-yield, but for all bond funds was a shift in individual investors (and fund marketers) viewpoints. Specifically, bond funds began being viewed, promoted and sold less as fixed-income producing investment and more as total return generators.
To me, this is one of the biggest mistakes the mutual fund industry made - another has to do with money market funds, but I'll address that at another time.
That's a mistake because it sends a message to investors that yields are of less importance when investing in these funds. And, as a result, confuses the investment decision. The increased (and sometimes exclusive) emphasis for high-yield funds on total returns undoubtedly serves the short-term investors. However, for the long-term, buy-and-hold group, total return may not always be the objective. For long-term investors, yield is often at the heart of the matter, and while total return should not be ignored, as an investment objective, there may be more suitable investment choices.
In Part 2, I'll explore some of the ways that high-yield bond funds can be used to meet investment objectives, particularly when saving for retirement.
Steve Schoepke is an economist with more than 25 years experience within the mutual fund arena. His expertise is in fund portfolio analysis and due diligence and he has worked in that capacity for firms such as Lipper Inc., Sun America and Alianz. Steve's M.S. degree is from the University of Wisconsin.
#
To read more columns, please visit the Fund Commentary with Steve Schoepke archive.
