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| The Not-Ready-for-High-Yield Players |
by
Karin Anderson
| 08-03-09 |
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The high-yield bond market's recent rally has been hard to ignore--the typical fund in this category has returned 22.5% for the year to date through June 18, 2009. That said, the category as a whole was down 26.4% in 2008, and factors including climbing default rates and potentially lower recovery rates for bankruptcies mean that the likelihood for continued volatility is high, and another high-yield sell-off is entirely possible if the economy continues to flounder.
Investors not ready to add a pure high-yield offering to their portfolios would be better served by sticking with an intermediate-term or multisector-bond fund. While these funds might offer some exposure to high-yield issues, they also offer more diversification in terms of credit quality and sector allocations.
Creating a screen for topnotch funds in these categories is a snap with Principia or Morningstar Advisor Workstation.
Special Criteria = Distinct Portfolios Only
And ( Morningstar Category = Interm-Term Bond
Or Morningstar Category = Multisector Bond )
And Purchase Constraints = Closed-New Investment
Simply screen for intermediate-term and multisector-bond funds that are open to new investment.
And% Rank Cat. 10 Yr <= 33
And Manager Tenure (Longest) >= 10.0
We limited the results to funds that ranked in the top third of their categories over the past 10-year period, making sure that the current management teams were responsible for the outperformance.
And Min Init Purchase <= 25000
Lastly, we required that the funds have investment minimums of $25,000 or less.
The funds that pass the screen include (as of June 18, 2009):
Metropolitan West Total Return Bond MWTRX
Managers Stephen Kane, Laird Landmann, and Tad Rivelle have successfully skippered this intermediate-term bond fund since 1997. During the 2009 Morningstar Investment Conference, Rivelle explained that his team has been finding some of the best opportunities among investment-grade corporate bonds and is only selectively hunting among higher- yielding issues including BB and B rated issues, as well as bank loans. A focus on residential and commercial mortgage fare in 2008 highlights the managers' contrarian bent, as these issues have been a drag on performance in the past year. Patience is required occasionally for this team's bets to pan out.
FPA New Income FPNIX
If the volatility in the high-yield bond market makes you too squeamish, FPA New Income won't cause you to lose any sleep. The fund has a stellar long-term record, and manager Bob Rodriguez has maintained a "buyer's strike" against high-yield bonds (as well as long-duration U.S. Treasuries) in recent years as a result of his top-down calls. Although Rodriguez is set to take a one-year sabbatical starting January, we take comfort in that he is handing the baton to his experienced comanager, Thomas Atteberry. Plus, Rodriguez is retaining his ownership stake in FPA and intends to return to the fund as assistant manager after his sabbatical.
TCW Total Return Bond TGLMX
Managers Jeffrey Gundlach and Philip Barach have navigated volatile mortgage markets over the past couple of years at TCW Total Return Bond with extraordinary skill. And while the team here has traditionally focused on collateralized mortgage obligation issues based on government agency-backed mortgage debt, recently it has ventured into more-adventurous segments of the market, and to good effect. For example, the duo has found compelling value in segments of the nonagency mortgage market (recently near 46% of assets), introducing credit risk to the portfolio, but they were purchased at distressed prices, and Gundlach argues that they offer strong total return potential even with continued mortgage market and economic stress, downgrades (of which there have been some), and defaults.
Managers Fremont Bond MBDFX
Bill Gross and his team at subadvisor PIMCO have delivered strong returns throughout the subprime-mortgage meltdown and subsequent financial crisis in 2007 and 2008 in large part because of a prudent approach to risk-taking, and that caution remains. Earlier than most, Gross and PIMCO saw trouble on the horizon for the housing sector, as well as the implications it could have for the economy, and they consequently maneuvered the fund to avoid the regions of the market most laden with credit risk. (Less than 2% of assets are rated below investment-grade). Instead, Gross emphasized issues with varying degrees of either explicit or implicit government support, such as agency-backed mortgage debt (recently, more than half of assets) or the short-term debt of corporations that carry FDIC guarantees.
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