July 2, 2003 — What was responsible for the continued solid performance by high-yield bond funds in the second quarter? Was it attributable to fundamental factors, like the health of companies and the economy, or did funds benefit simply because investors kept pouring money into them?
“It’s both, and it’s circular,” said Paul Matlack, who helps manage about $1.1 billion in fixed-income investments at Turner Investment Partners. “The cash coming in actually makes the fundamentals better,” he added.
Other fund managers and industry observers echoed Matlack’s thoughts. “It’s kind of a chicken and egg thing there, a little bit,” said Thomas Price, who oversees Strong High Yield Bond Fund/Inv (STHYX) and Strong Short Term Hi Yld Bond Fund/Inv (STHBX).
Funds that invest in high-yield bonds returned about 8% in the second quarter, preliminary figures from Standard & Poor’s show. They returned 14% through the first half of the year.
Investors began piling cash into junk bonds last fall because they appeared cheap, Matlack said. That boosted fund returns, which pulled more money in, and, in turn, caused companies to issue more junk bonds. As businesses refinanced their debts, their financial foundations became firmer, he said.
High-yield bond funds also have been aided by low interest rates, which have helped the economy grow while supporting corporate profits, fund managers and others said.
“The driving force is really the low interest rates,” said Joel Friedman, director of funds research at Standard & Poor’s. Friedman also noted that in the current environment, yields for funds that invest in speculative-grade bonds are more attractive than those for competing fixed-income investments, such as Treasuries or money-market accounts.
Junk bonds and funds that invest in them should also get a leg up as the tax cuts recently enacted by Washington further fuel the economic expansion, fund managers say.
Also working in favor of high-yield bonds has been the decline in the rate at which companies fail to repay these securities. The default rate has moved down to about 6% after hovering around 10% in 2001 and 2002, said Matlack, who helps run the Turner Funds High Yield Bond (PCSHX).
While fund managers said they expect high-yield bond funds to continue generating positive returns in the near future, they don’t see them putting up dazzling numbers.
“The fast money and the easy, sort of big money is probably behind us,” said Matlack.
High-Yield Corporate Bond Funds
Best PerformersSecond Quarter 2003 Returns
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