Street Wise: Making case for junk bonds after a strong run-up

The high-yield-corporate-bond market has been charging hard since at least November, when the asset class was ignited along with a rally in stocks.

So now the question is: How much more steam is left in the rally, if any?

“High-yield bonds have been offering tremendous yields by historical comparisons,” says Scott Berry, a mutual fund analyst with Morningstar Inc. of Chicago. “But that kind of run-up will be hard to duplicate the rest of the year.”

According to Morningstar, the average high-yield-bond fund gained 5.5% in November and 1% in December, and was up 11% year-to-date through last Wednesday.

“After a run-up like the one we’ve just seen, this has become more of a bond pickers’ market,” says Mr. Berry, who is based in Detroit.

Brendan White, manager of the Touchstone High Yield Bond Fund (THYAX), makes an argument for sticking with high-yield bonds regardless of this or any run-up.

Of course, Mr. White’s approach to high-yield-bond investing is tilted toward a multiyear time horizon and less on trying to time the peaks.

The $63 million fund, offered by the Touchstone Family of Funds in Cincinnati, was up 9.5% this year through Wednesday and up 7.2% annualized over the past 36 months, also through Wednesday. This compares with a peer group average annual return of 1.6% during the same three-year period.

“It’s our goal to be in the game in strong markets,” Mr. White says.

“But in down markets, we want to be ahead of the game. Combined, that usually puts us in the top percentile over longer periods of time.”

Some might argue that the fund is testing the limits of his high-yield status, considering that Mr. White typically avoids any C-rated bonds and almost always has some triple-B-rated (investment-grade) bonds in the portfolio.

Mr. Berry calls this more conservative approach to junk-bond investing unique among funds in the category.

Mr. White, who manages a total of $1.4 billion of high-yield-bond portfolios for Fort Washington Investment Advisers Inc. in Cincinnati, says he keeps the volatility low by relying heavily on double- and single-B-rated bonds.

The current allocation includes 45% exposure to both double- and single-B-rated bonds, an 8% allocation to triple-B-rated bonds and a 2% allocation to C-rated bonds.

The C-rated bond holdings, which represent the lowest credit quality in the portfolio, were downgraded to their current level since being purchased with B ratings.

Mr. Berry says most high-yield funds will allocate 50% or more of the portfolio to single-B-rated bonds and carry as much as a 10% stake in C-rated bonds.

media event

The frothy debate leading up to Friday’s much-anticipated decision by the Federal Communications Commission to rewrite the 70-year-old rules for preventing media monopolies has been a bit of a bonanza for media company stocks

While the FCC’s action is both controversial and political, with those opposed to the rule changes claiming it will lead to unchecked media consolidation, the market is already betting on the upside.

The Dow Jones Media Index, represented by 59 media companies, gained more than 15% this year through last Thursday.

According to industry analysts, the market is bracing for a likely increase in merger-and-acquisition activity from within the group.

Stock price run-ups are expected to carry some momentum into the typically quieter summer months.

Some of the largest companies in the market-cap-weighted index – those in the best position to drive the consolidation – include Tribune Co. (TRB) and Viacom Inc. (VIA).

The former, which owns the Chicago Tribune and Los Angeles Times, as well as some television stations, closed Friday at $49.98 a share, up 10.5% for the year.

New York-based Viacom closed Friday at $45.65 for a year-to-date increase of 11.9%.

Questions, observations, stock tips? E-mail Jeff Benjamin at [email protected].