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High yield bonds struggle to keep up

jnelson@globeandmail.com

What are we looking for?

One month ago we zeroed in on the performance of high-yield bond funds, which have had a volatile year as investors react to political and geopolitical issues around the world. We've since received updated data for this fund category and wanted to revisit the chart to reassess the non-investment grade debt landscape.

The screen

We looked for the 15 high-yield fixed-income funds with the top returns for the year ended Sept. 30. U.S. dollar, segregated, pooled and duplicate versions of the funds were excluded. We also kept an eye on returns for the month of September.

Funds in this category invest in debt securities with a credit rating below the level of BBB or equivalent, or have at least 25 per cent of the portfolio invested in these securities.

What did we find?

High yield bonds come with extra risk that issuers will be unable to repay their debts, and performance of funds in the screen were varied.

Only about half of the funds in the table outpaced the gains of the S&P/TSX Composite Index, which gained 7.1 per cent in the period. Some funds, including the top performer in the year-long period, lost ground in September.

Many of the funds in this chart invest primarily in the U.S. high-yield securities, which have been heavily influenced by the speculation around when the Federal Reserve would rein in its multi-billion-dollar monthly bond-buying program.

Yields have fluctuated based on expectations for tapering of this quantitative easing program, and investor appetite for riskier assets. This has contributed to big fund-flow swings in and out of high yield through 2013.

The SEI U.S. High Yield Bond P is the top-ranked fund in the chart, posting an annualized gain of 10.2 per cent in the period.

Richard Bamford, a senior portfolio manager at SEI Investments, says default rates on debt have come down below their historical average, which is good for investors.

Many companies have been looking to refinance their debt in the low rate environment, which has driven up bond issuance to new records, Mr. Bamford said.

The Manulife High Yield Bond Fund climbed by 8.7 per cent in the year to Sept. 30, and it also invests heavily in the U.S., with 60 per cent of assets allocated toward the country, and another 33 per cent in Canada.

Despite the uncertainty this year, Manulife portfolio manager Konstantin Kizunov has a positive outlook for high yield. The "strong investor demand for riskier assets, default rates that are below the long-term average and relatively low yields on Treasury bills" in the U.S. contribute to this view, he wrote in a fund commentary at the end of the third quarter.

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HIGH YIELD BOND FUNDS TO SEPT. 30

% return (Sept. 30)% returnAssets
Fund1-mo.1-yr3-yr5-yr10-yr2012201120102009MER($-mil)
SEI US High Yield Bond P-1.7%10.2%7.7%11.7%5.1%7.9%2.0321.0
Manulife High Yield Bond Fund1.0%8.7%14.5%2.1652.6
Fidelity American HY Capital Yld-A-1.6%8.3%9.8%2.149.9
First Trust Adv Short Dur High Yld0.9%7.8%16.0%2.4561.6
TD High Yield Bond-I0.5%7.4%6.6%8.9%4.2%11.5%0.7%12.7%68.6%2.001,655.1
Renaissance High Yield Bond1.0%7.2%5.9%6.6%5.0%10.6%1.5%9.5%31.9%1.94203.0
Horizons High Yield Bond ETF1.0%7.2%0.6037.4
Frk High Income1.0%7.0%7.7%9.1%3.4%13.7%3.0%10.8%35.1%2.5157.6
Norrep High Yield Class0.3%6.7%7.6%2.0057.7
Fidelity American High Yield-A-1.6%6.7%5.8%8.8%3.6%10.1%4.8%6.2%25.5%2.1470.5
IG Putnam U.S. High Yield Income1.1%6.5%7.4%8.4%14.1%1.2%12.4%43.5%2.27535.2
BMO High Yield US Corp Bond Hed ETF1.1%6.4%8.0%14.6%4.8%10.3%0.62609.9
iShares U.S. High Yield CAD-Hedged0.9%6.3%7.9%11.0%6.8%0.60575.5
O'Leary Global Bond Yield -Sr A0.6%6.2%4.9%14.7%-3.5%2.1043.9
iShares AdvSht Duration HighInc Com0.6%5.9%8.5%0.55295.6
Source: Lipper

© 2007 The Globe and Mail. All rights reserved.

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