Best High-Yield Bond Funds: IA Mutual Fund Focus, April 2010

Among these funds, we screened for those that had Standard & Poor’s 5 star rank, $20 million or more in assets, no upfront sales load, and minimum initial investments of $20,000 or less. We then sorted through the dozen funds that meet those criteria, looking for funds that combined low expense ratios, consistently strong performance over the past one-, three-, and five-year time periods, and high distribution payments, and chose three funds with different combinations of attractive features.

For consistently strong performance combined with low cost, it’s hard to beat the $11.7 billion Fidelity Capital and Income Fund (FAGIX *****). Over the past five years, the fund has delivered an average annual return of 8.86%, the sixth best of the entire high-yield group, while charging an annual expense ratio of 0.78%, among the lowest of the group. Its three-year average annual return of 7.41% is within the top 10 of high-yield funds, as is its one-year return of 73.8%. The fund currently has an SEC 30-day yield of 6.36%, similar to the other funds chosen. It is the most highly diversified, with 535 holdings, and has about 15% of assets invested in equities and 13% in foreign debt.

An even stronger performer, however, is the Aegis High Yield fund (AHYFX *****), which has delivered an average annual return of 9.68% over the past five years, fourth best among all high-yield bond funds, and its 7.6% return over the past three years beats Fidelity Capital and Income’s. It nearly matched Fidelity’s fund in one-year performance with 71.8%, and its 30 day yield of 6.35% is about equivalent as well. The fund’s costs, at 1.2%, are significantly higher than the Fidelity fund, though slightly below the peer average of 1.27%, according to Lipper data. With assets of $22 million spread across just 49 holdings, it has a far more concentrated portfolio than the other funds.

The Artio Global High Income Fund (BJBHX *****) has delivered similar returns to investors as the Fidelity and Aegis funds, with a five-year average annual return of 8.53% and a three-year average annual return of 7.51%, and while its 53% gain over the past year trails the other funds appreciably, it is still above the peer average of 47.4%, according to Lipper data. This $1 billion fund has 22% of its holdings in non-U.S. companies. Its expense ratio of 1.02% is below the peer average. More than 20% of its 146 holdings are from non-U.S. issuers.

S&P Senior Financial Writer Vaughan Scully can be reached at [email protected]. Send him your ideas for mutual fund story topics.