Back to Main

Flow Reverses for High-Yield Bond Funds: 3 Funds Worth Buying Now - Mutual Fund Commentary

Posted: 8/25/2014 11:48:00 AM
Referenced Stocks: TFCVX;NEHYX;EKHYX

High-yield bond funds have finally rebounded from the record outflow they witnessed for about a month. Threat of an interest-rate rise and the winding down of monetary stimulus had left investors fleeing the sector till early August. The first week of August was noticeable with high yield funds witnessing a record $7.1 billion outflow. Bank of America Merrill Lynch said it was the biggest outflow ever in dollar terms.

However, the current data shows that the high-yield asset class has seen the highest inflows since September last year. This was also the second straight week of inflows into high-yield bond funds. Stock funds too witnessed inflows for two straight weeks and inflows for the week ending Aug 20 were the biggest since June.

The trend does suggest that investors are back to take more risk. Stock markets have been rallying of late and the benchmarks hit record highs on Aug 21. Meanwhile, the latest Fed minutes gave no clear indication about the timing of a rate hike as policymakers had differing views.

If investors are keen on taking risk again, we will suggest 3 top-ranked high-yield bond funds that are likely to outperform their peers. Before doing so, let's see how things have shaped up.

Record Outflows & the Turnaround

Lipper reported a record $7.1 billion retail-cash outflows from high-yield funds in the week ending Aug 6. This outflow broke the previous record outflow of $4.63 billion in Jun 2013. Also, high-yield bond funds saw $12.6 billion of outflow for four weeks, making the four-week trailing average stand at a record $3.15 billion.

A Lipper official had said: "This past week, investors took their collective foot off the gas pedal, weighing the implications of strong economic growth and what effect increasing wage inflation might have on the Federal Reserve's interest-rate policy."

A combination of negatives had caused investors to flee to safety by purchasing U.S. and German bonds.  This had caused the yields of major bonds to decline, as bond yields decline as prices go up, and bond yields go up while prices go down. (Read: Bond Prices Rise as Chaos Rules in Europe and Russia )

The geopolitical tensions related to the Russia-Ukraine crisis had kept investors jittery. (Read: MH17 Crash, Fresh US Sanctions: Beware of Funds with Russia Exposure ). Separately, economic data had been dismal in Europe.  

However, the turnaround is evident now with two weeks of inflows into high-yield junk bond funds. According to Thomson Reuters' Lipper service, investors put $2.2 billion into high-yield junk bond funds in the week ending Aug 20. Stock funds attracted $9.9 billion in the same period. Stocks mutual funds saw inflows of $1.3 billion, reversing the four-week outflow streak.

Also, Taxable bond funds attracted $6.7 billion, the biggest inflow since February. Emerging market debt funds saw $183 million worth of inflow.

3 High-Yield Bond Funds to Buy Now

Here we will share with you 3 High Yield - Bond funds with no sales load and high year-to-date return.

The funds below carry a Zacks Mutual Fund Rank #1 (Strong Buy) . Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Third Avenue Focused Credit Investor (TFCVX) seeks total return over the long run that may comprise investment returns from various sources including growth of capital. The fund invests a lion's share of its assets in bonds and other credit instruments that are rated below investment grade. The non-diversified fund may invest significantly in distressed and defaulted securities.

The fund has returned 8.9% year to date. Also, the fund has healthy one and three-year returns of 16.6% and 13.6%, respectively.

Loomis Sayles High Income Y (NEHYX) seeks high current income and the prospect for growth of capital. It invests a minimum of 65% of its assets in fixed-income securities with junk ratings. A minimum of 65% is invested in US corporate or dollar-denominated foreign fixed-income securities. A maximum of 30% may be invested in foreign currency-denominated fixed-income securities.

The fund has returned 7.5% year to date. Also, the fund has healthy one and three-year returns of 13.7% and 10.6%, respectively.

Wells Fargo Advantage High Yield Bond Administrator (EKHYX) seeks total return that includes high current income and capital growth. It invests most of its assets in high-yield, below investment grade rated debt securities. The fund portfolio is not managed by the fund till a specific maturity.

The fund has returned 6.6% year to date. Also, the fund has healthy one and three-year returns of 11.6% and 9.4%, respectively.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our  Mutual Fund Center .

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Get Your Free (TFCVX): Fund Analysis Report

Get Your Free (NEHYX): Fund Analysis Report

Get Your Free (EKHYX): Fund Analysis Report

To read this article on click here.

Zacks Investment Research