We already own quite a bit of preferred shares issued by Annaly Capital Management (NLY), but I'm re...
High Yields at Bargain Prices
09/13/2007 12:00 am EST
Bryan Perry, editor of The 25% Cash Machine, thinks high-yield bonds will bounce back if the Fed cuts rates, and he finds a closed-end fund that would be a big beneficiary.
Pioneer High Income Trust (NYSE: PHT) is, in my view, the “best of breed” within the high-yield closed-end bond funds. It invests primarily in debt securities, loans, and preferred securities.
High-yield bonds are rated below investment grade so don’t think for a second that these are like Treasuries. Seventy-five percent of what PHT owns is rated “BBB” or lower, reflecting the cyclical nature of a lot of businesses it invests in. Non-investment-grade corporate bonds definitely trade like the underlying common stock of the companies to which the debt is tied.
Management fees are low by industry standards at a miniscule 1.01% per year and the fund leverages the portfolio by only 25%—also low by industry standards. There is about 27% annual turnover among PHT’s holdings and its top holding is Xerox Corp. That’s hardly subprime mortgage paper, yet the fund’s shares have been sold down like subprime debt-related funds.
The trust’s portfolio comprises investments in a wide range of areas including energy, capital goods, transportation, consumer durables, media, retailing, pharmaceuticals and biotechnology, diversified financials, and technology.
Certainly the airline and energy sectors are cyclical businesses, and subject to getting hit hard during recessionary periods. So, PHT actively manages the portfolio, rotating in and out of sectors that are leveraged to current economic conditions.
The flight to quality stemming from the subprime meltdown has made yields on corporate bonds attractive. Pioneer High Income Fund has an excellent track record for paying out steady monthly dividends. After 17 hikes in the federal funds rate, it’s time to buy a corporate bond fund that has a stellar track record and take advantage of what should be a powerful rally in corporate debt instruments if and when the Fed starts lowering rates this fall.
As rates drop, bond prices rise and refinancing activity surges. And now, with the bond mavens pounding the table for a rate cut in September and October, this should kick start the high-yield bond market.
Pioneer High Income Trust has a history of trading at about a 10% premium to its net asset value (NAV). In fact, PHT entered the year trading with a stiff 14% premium to NAV. [Right now] PHT is trading at a slight discount to its NAV, so I’m recommending buying shares of the company up to $17 per share. (It closed below $17 Wednesday—Editor.) Plus, we lock in a 10.6% dividend yield in a bond portfolio trading 17% off its 52-week high.
Assuming the Fed does lower rates and the credit markets rebound, we can anticipate a 25% total return for Pioneer High Income Trust during the next 12 months.
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