NEW ENGLAND JUNK BOND FUND CLIMBS OVER CHAIN-LINK FENCE TO RESPECTABILITY: TOPS PEERS AFTER JUST HANGING OUT FOR YEARS

Once a junk-bond dog, the New England High Income Fund appears to have made it out of the doghouse.

The 14-year-old load fund — for which Loomis Sayles & Co. took over as subadviser from Back Bay Advisors Inc. in July 1996 — returned 13.47% for A shares for the year through March 16, beating an average 13.18% for its peers during the same period, according to fund tracker Lipper Analytical Services Inc. of Summit, N.J.

That’s a major improvement from the 8.90% average annual return it posted between its inception on Feb. 29, 1984, and Dec. 31, 1996. By contrast, the average Lipper high-yield fund returned 10.69% over that period.

falls Behind lately

Still, the $112 million fund has slipped a bit this year. For the year-to-date period ended March 16, it is up 2.3% for A shares, which have a front-end sales charge, while its peers returned 3.45%, according to Lipper. Loomis manages the fund for New England Funds, a subsidiary of New England Investment Cos. Both are in Boston.

“Whatever (manager Gary L. Goodenough) was doing that worked well in the last half of the year is not working as well now,” says A. Michael Lipper, president of Lipper.

The fund’s recent performance, Mr. Goodenough says, has been dragged down by two of its holdings — Petroleum Heat and Power Co. of Stamford, Conn., and the Penn Traffic Co., a Syracuse, N.Y.-based supermarket chain.

Low demand for heating oil during a mild winter in the Northeast has hammered Petroleum, and Penn Traffic has had weaker than expected same-store sales, a performance barometer that gauges sales in stores open for at least a year. Petroleum makes up 1.3% of the fund’s holdings, Penn Traffic 1.5%.

“I believe the worst is behind us,” says Mr. Goodenough. “We’ve taken our markdown on those two bonds. The rest of the portfolio is doing very well.”

The effects of El Nino aside, Mr. Goodenough has turned around the portfolio by paring its holdings from 138 in 1996 to about 40 “issues we know very well,”
he says.

The fund has also been fairly aggressive overseas, targeting companies that have strong exports and are taking steps to cut costs.

Still, the Asian crisis has prompted Mr. Goodenough to scale foreign holdings back to less than 10% from 14% late last year. Mexican issues account for 6% of the fund, with smaller holdings in Canada and Germany. All are in dollars, so currency volatility is not a problem.

want 10.5% and up

Mr. Goodenough seeks bonds that yield at least 10.5% and a good chance for improved credit quality that would lift prices. The bonds have an average credit quality of B and an average duration (weighted average maturity) of 3.8 years.

One of the fund’s largest holdings, CSK Auto, for instance, recently announced plans to make a public offering, which is likely to improve its credit quality. The company’s bonds are now rated B3 by Moody’s Investors Service and B-minus by Standard & Poor’s. CSK, one of the largest auto parts retailers in the West, has been cutting costs and updating computer systems in an effort to improve inventory control.

Says Mr. Goodenough: “We’re bottom-up bond pickers, looking for higher yielding bonds with improving credit profiles.”