Lux Investing
How do you find out if your high yield fund has real levereged buyout junk or good but lower qualitybonds?
Although there was a sharp increase in the interest rate on low-grade debt securities, there was little if any increase in interest rates on investment grade securities, which constitute the vast majority stocks in S&P 500. This is because the increase in the spread between investment-grade bonds and the Treasury yields was more than offset by the drop in U.S. treasury yields, so credit costs for quality stocks have not increased. But high yield mutual funds may not differentiate between lower quality bonds the the LBO junk? HOw do you tell what a particular high yield fund has? I don't want to invest in the buyout of Cadbury Schweppes soft drink segment.
Public Comments
- Usually the funds will give you a distribution of the credit quality (i.e., rating) and concentrations including the top 10 holdings. Ofcourse, bond funds will indicate if they are high yield, leveraged focused or both in the objectives of their prospectus, so check the investment profile of your particular fund. Since risk is priced based on overall credit quality, an LBO with promising outlook may perform just as well as a B-rated corporate that is not leveraged. Also, yields are moving now based on credit spreads and outlook on economic trends resulting in shifting pricing. Corporate bonds that aren't floaters (medium to long term), won't be impacted by Treasury movements. Rates are fixed, as Treasury yields decline, risk spreads widen.
- As PK mentioned you have to check what the fund is invested in. Of course for us neophytes, that does not help a whole lot. After all S&P and Moody were rating mortgage backed paper as investment grade until very recently. They have also been know to rate as AAA paper that was worthless. For what it is worth there may not be any good lower quality bonds. Even some higher quality bonds may not be good. There are a couple of steps you can take if you are so inclined to invest in junk bond funds. First, what is the total number of bond holdings that the fund has. The more they have the lower the risk from any one rolling over. Second, don't go for the highest yield. You will be asking for trouble if you do. Third, this is not a particularly good time to be investing in junk bonds. There is fear in the air. Here is an example: FAGIX has 505 different bonds also a 5 star Moringstar rating and a relatively low expense ratio and zero mortgage backed debt. But 75% of the debt is rated bb or below. All junk. 1 default will account for only 0.2% of the portfolio. Yield about 10%. More or less.
