The stock market has not been a great place to invest in the
past decade. In fact, the S&P 500 is lower now than it was 10
years ago.
Bonds, on the other hand, have been a much better place to invest.
The Barclay's Capital U.S. Aggregate Bond Index (an
index
of investment-grade corporate bonds) had an average annual return
of about +6.5% during the past 10 years. Other types of bonds have
been much better.
High yield bonds, as measured by the Barclay's Capital High Yield
Very Liquid Index, averaged about +6.8% per year during the past 10
years and have performed much better than that lately. The average
emerging market closed-end bond fund has averaged a whopping +13.8%
return a year for the past 10 years, according to ETF Connect.
Sure, these different bond investments have been great in the
rearview mirror, but there is also reason to believe that certain
sectors should continue to perform well going forward.
The
AllianceBernstein Global High Income Fund (
AWF
)
is a
closed-end fund
that seeks high income and
capital appreciation
through any kind of debt security the fund sees fit to invest in
from anywhere in the world. As of June 30th, AWF was primarily
invested in high yield bonds (44%), emerging market government and
corporate debt (19%) and corporate
investment grade
bonds (9%).
Top country allocations include the United States, Russia and
Brazil. The fund also had about 88% of assets invested in U.S.
dollar-denominated securities, which has been a good place to be as
the dollar has rallied strongly against other major currencies in
2010.
So, what's the big deal with this particular fund?
There're a lot of multi-sector bond funds out there. The big deal
is the amazing results this fund has posted. Morningstar ranks AWF
in the top 1% of performance for the emerging market debt category
for just about every measurable period. The fund has achieved
remarkable annualized total returns of +18.5%, +14.4% and +15.7%
for the past three, five and 10 year periods, respectively.
The beautiful thing about this fund is that it isn't limited to any
one bond sector that could fall out of favor. The fund can move to
different sectors and locations all over the world to find the best
possible opportunities at any given time, and management has proven
itself worthy of this flexibility.
There are reasons to be optimistic about the sectors in which AWF
is currently invested.
High
yield
bonds had their best year ever in 2009 -- the Bank of America
Merrill Lynch High Yield Index returned a whopping +57% for the
year. However, history indicates that high yield bonds can run for
a few more years. After a terrible market in 1990, the high-yield
bond sector outperformed Barclays Capital Aggregate Bond Index all
the way through 1997. And, after the 2002
bear market
, high yield bonds outperformed investment grade bonds through
2006.
A falling corporate default rate (an important gage of high yield
bonds, as it measures the level of risk in the sector) should be a
huge tailwind for the sector in the coming quarters. Moody's
reported in early June that global default rates are on the way
down and have now fallen -44% from their peak of 13.5% in November
2009 to about 7.5% today. The ratings agency is also calling for
the U.S. corporate default rate to plummet to just 2.9% by the end
of 2010.
Meanwhile, emerging market debt continues to perform well.
According to the J.P. Morgan Emerging Market Bond Index,
emerging-market bonds have been the top performing bond sector of
the past fifteen years.
Not only have emerging markets experienced unprecedented economic
growth in the past decade, but most emerging market countries
didn't overindulge in subprime assets and have emerged from the
financial crisis with stronger balance sheets than many Western
governments. The debt quality is improving and interest rates are
still relatively high.
The investment -grade bond sector continues to trade at
historically high spreads. Investment grade bonds offer higher
yields than the 10-year average credit spread (the difference in
yield from 10-year treasuries). This sector also offers investors a
relatively safe alternative to treasuries in uncertain markets.
The fact is all three sectors have merit. But, with the amount of
uncertainty in today's market, it's not a bad idea to diversify.
AWF pays a monthly distribution that has steadily risen since 2004.
The fund yields 8.4% after a recent monthly distribution hike in
December from $0.0925 to $0.10. Since AWF is a closed-end fund that
trades on the New York Stock Exchange, it can be bought or sold any
day the market is open just like a stock. And distributions can be
taken as income or easily reinvested.
Action to Take -->
In both the short and long term there is likely to be some class of
debt securities that performs well in some part of the world, and
this fund is likely to find it. Income investors should consider
AWF as a core holding.
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-- Tom Hutchinson
Tom has a 15-year history as a financial advisor with UBS
constructing investment portfolios. Tom's background includes a
NASD Series 7 and 63 certifications... Read more...
Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
StreetAuthority