Fund Commentary with Steve Schoepke
"Partial" to High Yield Bond Funds (Part 2)
In Part 1 "Partial to High Yield Bond Funds", I reviewed their recent history, which is interesting for no other reason that it is a reminder of what attracted investors to fixed income funds in the first place. Many of the assets finding their way to bond funds, and high yield funds in particular, back in the 1980s, were transfers from lower yielding bank CDs. In addition, many of these early bond fund investors either were already retired or were of an age group that soon would be. In general, they had already gone through their asset accumulation phase and were transitioning into the distribution stage of their investment life cycles.
Today, many investors fall into the same category. Mutual fund companies and distributors are very aware of this, and are busily cranking out products targeted at these investors and their accumulated assets. These products come under a range of different labels, life-cycle, target-dated, target-risk funds, and so forth. Most employ asset allocation frameworks and are marketed as providing investors with a simplified way to "having their cake and eat it too". The benefits to fund companies and distributors are substantial - a subject that I will address in a in a future article -- however, their performance benefits for investors are anything but clear at this time. But it is worth asking whether such elaborately structured products are necessary in the first place?
I would suggest that a decent alternative to these schemes might be found in the trusty, old high-yield bond fund. For investors still in the asset accumulation stage of life, using a high-yield bond fund as one of their IRA or 401(k) Plan choices can fulfill some of their main investment objectives. For one thing, high-yield bond funds provide a steady and attractive flow of dividend income, which over a longer investment horizon helps to smooth short-term market volatility. In addition, research has found that the price movement of high-yield bonds is correlated with equities, especially small-cap growth stocks.
For those already retired and looking to their investment as a source of supplemental income, the yields from high-yield bond funds allow for steady income distribution when taken in cash. Moreover, for retirees concerned with depleting their nest egg too soon, the equity-like performance behavior and potential for market appreciation also works.
While I don't believe and would never recommend putting all one's retirement savings into high-yield bond funds (or any single asset class for that matter), there are compelling arguments for not overlooking them.
Steve Schoepke is an economist with more than 25 years experience within the mutual fund arena. His expertise is in fund portfolio analysis and due diligence and he has worked in that capacity for firms such as Lipper Inc., Sun America and Alianz. Steve's M.S. degree is from the University of Wisconsin.
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