High Rated, High-Yield Bond Funds

12/11/2015 9:00 am EST

Focus: FUNDS

Russel Kinnel

Editor, Morningstar FundInvestor

A high-yield sell-off that started in June has gained steam as some watchers say that defaults will double in 2016 mainly because of problems in the energy sector, observes Russel Kinnel of Morningstar FundInvestor.

Still, higher yields are making high-yield bond funds look more appealing, provided defaults don’t get too prevalent, of course. Let’s examine the some of our highest-rated funds in the category.

T. Rowe Price High-Yield (PRHYX) has impressed to the point that we recently raised its rating to Gold from Silver. The fund’s five-year returns are in the category’s top quartile.

Mark Vaselkiv is an experienced manager who has done a fine job navigating through different markets. A slight overweighting to CCCs has led to a 4.3% loss since June, however.

Fidelity Capital & Income (FAGIX) is on the more aggressive side of the category. That’s why Mark Notkin’s fund sports a Silver rather than Gold rating.

The fund’s long-term returns are top-decile, but they have come with added risk that has singed the fund from time to time. It is down 3.5% since June because of a slight overweighting in CCCs. On the plus side, Notkin has remained wary of energy.

Vanguard High-Yield Corporate (VWEHX) has per-formed just as expected given its bias to the higher-quality end of high-yield.

The fund’s five-year returns are in the category’s best quintile and that owes a fair amount to losing less in downturns such as the current one.

The fund is down a modest 1.4% since June 1. If you’re wary that default growth could get out of hand, this is a better bet than the rest of the field.

Eaton Vance Income Fund of Boston (EVIBX) boasts top-quartile five-year returns and a surprisingly small 2.4% loss since June.

The fund has its share of CCC-rated bonds, but it has kept mainly to short-term paper, which has held up better than longer-term CCC debt.

Since the fund got burned in the credit crunch of 2008, it has been more defensive. Its navigation of the latest market sell-off is a positive sign for those efforts.

Bronze-rated Fairholme Focused Income (FOCIX) is actually still in the black for the year. Bruce Berkowitz’s concentrated portfolio means that performance isn’t really about any sector or macro positioning so much as about the health of a few big holdings.

The fund was near the bottom of the pile in 2014, so I’d say it is probably the riskiest of the lot even after its fine performance so far in 2015.

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