(PUB) Investing 2015

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High-Yield Funds in a Challenging Year Tracking Morningstar Analyst Ratings | Russel Kinnel

Fidelity Capital & Income FAGIX is on the more ag- gressive side of the category. That’s why Mark Notkin’s fund sports a Silver rather than Gold rating. The fund’s long-term returns are top-decile, but they have come with added risk that has singed the fund from time to time. It is down 3 . 5% since June because of a slight overweighting in CCC s. On the plus side, Notkin has remained wary of energy. Vanguard High-Yield Corporate VWEHX has per- formed just as expected given its bias to the higher-quality end of high yield. The fund’s five-year returns are in the category’s best quintile, and that owes a fair amount to losing less in downturns such as the current one. The fund is down a modest 1 . 4% since June 1 . If you’re wary that default growth could get out of hand, this is a better bet than the rest of the field. Eaton Vance Income Fund of Boston EVIBX boasts top-quartile five-year returns and a surprisingly small 2 . 4% loss since June. The fund has its share of CCC rated bonds, but it has kept mainly to short- term paper, which has held up better than longer-term CCC debt. Since the fund got burned in the credit crunch of 2008 , it has been more defensive. Its navi- gation of the latest market sell-off is a positive sign for those efforts. Bronze-rated Fairholme Focused Income FOCIX is actually still in the black for the year. Bruce Berkow- itz’s concentrated portfolio means that performance isn’t really about any sector or macro positioning so much as about the health of a few big holdings. It’s worth noting that Third Avenue Focused Credit TFCVX is currently illustrating the flipside of focus as it is getting crushed for the second year in a row. But everything is ducky at Fairholme Focused, where enormous bets on Sears SHLD , Imperial Metals IPMLF , Fannie Mae FNMA , plus a big cash stake have helped it weather the storm. The fund was near the bot- tom of the pile in 2014 , so I’d say it is probably the riskiest of the lot even after its fine performance so far in 2015 . K

Prices are down and yields are up. A high-yield sell- off that started in June has gained steam as some watchers say that defaults will double in 2016 mainly because of problems in the energy sector. Still, higher yields are making high-yield bond funds look more appealing, provided defaults don’t get too prevalent, of course. Let’s examine the record of six of our highest-rated funds in the category. It’s encouraging that five of the six have strong five-year records and one is merely middling. Fidelity High Income SPHIX is our one middling per- former in the group. We give it a Morningstar Analyst Rating of Gold in part for its blend of aggres- sion and caution. The fund’s five-year returns aren’t impressive. That’s mostly due to a historically cautious stance from Fred Hoff, but its aggressive side has hurt more recently. While the fund has had an overall credit profile less risky than its peers’, Hoff dialed up the fund’s CCC exposure in 2015 . The timing was poor, as that strata of the high-yield market was shellacked. Thus, the fund has lost a dis- appointing 4 . 2% from June through October. Hoff’s long record is strong, though, so we’re keeping the fund at Gold. T. Rowe Price High-Yield PRHYX has impressed to the point that we recently raised its rating to Gold from Silver. The fund’s five-year returns are in the category’s top quartile. Mark Vaselkiv is an experi- enced manager who has done a fine job navigating through different markets. A slight overweighting to CCC s has led to a 4 . 3% loss since June, however.

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