"High Yield" Funds Earn Value Outside Junk Market
August 2, 1999
Some of the best-performing high yield mutual funds are earning their largest returns in other asset classes, begging the question of why they call themselves high yield funds in the first place.
Statistics from Morningstar Inc. indicate that the top-performing funds for the first half of the year have up to 70% of their assets in the "other" category, which does not entail any bonds, or even stocks of high yield issuers. Most common in this category are convertibles and preferred securities, investors said.
Investment allocation is always a caveat for any mutual fund, not just high yield, said Kingman Penniman, president of KDP Investment Advisors. He said each fund usually has a self-imposed maximum that can be put into other securities that is spelled out in the prospectus.
However, other market players were more critical of this practice, arguing that it befuddles investors.
One high yield portfolio manager said it made matters confusing for individual investors who are choosing among possible investments. (This particular portfolio manager did not make the top 25 in Morningstar's statistics.)
He said when investors are trying to spread their cash over the spectrum of choices, it becomes difficult to evaluate their high yield bonds when half of that money is actually in some other kind of security.
The top performing funds for the first half were Dreyfus, Fidelity, Loomis Sayles - it ranked twice in the top five with two different funds - and Third Avenue.
They all returned higher than 10%, while the overall high yield sector returned just over 2%, according to the Lehman Brothers index.
The Dow Jones Industrial Index returned 20.5%, while the Credit Suisse First Boston Convertible Bond index returned 8.4%, and the J.P. Morgan Emerging Market index returned 10.6%. (All the index results came from Morningstar.)
Third Avenue portfolio manager Margaret Patel said she simply invested in areas that were performing better than high yield where there was greater capital appreciation. Namely, she invested in convertibles because the underlying stock made for a better upside in the form of equity participation, she said.
She said her fund outperformed because of the sector selection: She overweighted technology, telecommunications and semi conductors.
The other fund managers in the top five could not be reached for comment by press time.
Dreyfus had 67% of its assets invested in other areas; Fidelity had 70%; Loomis Sayles had 64.8% and 58.2% in its two funds; and Third Avenue, 41.8%.