HIGH-YIELD BOND FUNDS
High-yielding bond funds and risk-taking go hand-in-hand. Just ask the women who manage them.
Look at the total returns in the bond arena and you'll find that the highest fixed-income total returns lately have come from the riskiest bond fund category; high-yielding bonds.
According to Wiesenberger/ Thomson Financial, the year-to-date total return for the average corporate high-yield fund through October 31, was 5.52 percent. The second highest performing group was the multi-sector bonds, They were up on average 1. 66 percent.
In a nutshell, high-yielding corporate bonds are more rewarding because the interest rates on them are typically percentage points higher than those found on high-quality and government bonds. But along with that higher interest rate comes more risk.
Specifically, that risk centers around the ability of a bond issuer to make timely principal and interest payments on their debt---in other words, see to it that their bond holders get what they bargained for.
"The real risks are the individual (issuing) company risks," says Diane Keefe, portfolio manager of the Pax World High Yield Fund, (800-767-1729), a brand new fund and the first socially responsible high-yield bond fund to hit the market. "And that's why you have portfolio managers--- to identify and manage those risks."
Margaret Patel, is one of the team of managers behind the Pioneer Strategic Income Fund, (800-225-6292). It's a high-yield fund that's also new to the market this year.
Patel said that the default rate on high yield bonds has been creeping up lately---from a low point of about 2 percent in 1997 to over 5 percent currently, (Percentages are based on a 12-month trailing figures.)
"The increase is partly due to emerging market debt defaults, but it also reflects the growing number of weaker credits that have been able to tap a very strong high yield market here in the U.S.," she says.
Managed for high current income and with an eye for value, three sectors Patel currently likes are technology, telecommunications and energy. Two she's staying away from are retailing and gaming. Why? Because it's hard for companies in those sectors to maintain an identity that's distinct from their competitors.
Keefe is also no fan of the gaming industry but for a very different reason. Gaming stocks are what Pax calls a "vice" companies, as are companies that make defense or weapons-related products, tobacco, alcohol or gambling products."So, if you don't like your money being made from slot machines and poker tables, then our fund offers the only publicly available alternative," says Keefe.
Bonds in the Pax World High Yield Fund's portfolio will be representative of companies with high asset values in relation to their debt, and from industries like telecommunications, media, manufacturing, consumer products, health care and the service industries.
"We're looking at companies that solve the world's problems and make money while they are doing it," says Keefe.
Having screens as stringent as Pax does seems like it could shoot the fund's high-flying performance potential in the foot. But being No. 1 is not necessarily what Keefe said the fund aspires to. She's looking to build a portfolio made up of high-quality high-yielding bonds from socially responsible companies that offers a "competitive" return.
Investors might be wise to do the same when assessing the total value of their own mutual fund portfolio---be satisfied when its returns are competitive with the market's.
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