Secret Behind Junk Funds That Made Money in 2015: No Heroicsby and
Wells Fargo, Rochdale, Prudential played it safe, shunned oil
`Not a bad strategy' still, as high-yield pain seen lingering
Don’t be a hero.
That’s the strategy the most successful high-yield money managers of 2015 attribute to their success. As junk bonds tanked, defaults rose and Third Avenue Management LLC shocked the market by temporarily suspending shareholder withdrawals, managers at the top speculative-grade funds this year benefited by simply staying away from the worst of the carnage.
That meant resisting the lure of junk-bonds issued by the riskiest borrowers even as yields rose to their highest levels since the financial crisis, holding on to debt that would mature soonest, and avoiding anything that reeked of oil.
"Our goal is to pick the safest securities in the market," said Tom Price, who co-manages a $1.4 billion high-yield fund at Wells Fargo & Co. "We are willing to lag our competitors. But when the market turns south, then we are at the top."
The Wells Fargo Short-Term High Yield Bond Fund, which has lagged behind the market in each of the previous six years, led the way in 2015 among high-yield funds holding assets of more than $1 billion, with a return of 2 percent through the end of last week. That compares with a 5 percent loss in the $1.4 trillion high-yield index, the first decline since 2008.
City National Rochdale Fixed Income Opportunities Fund, which added 1.6 percent, and the Prudential Short Duration High Yield Income Fund, up 0.7 percent, were the next highest gainers, according to data compiled by Bloomberg.
Wells Fargo’s Price loaded up on debt that comes due within three years, especially securities rated one level below investment grade, according to data compiled by Bloomberg. A portfolio of BB rated bonds in the Bloomberg USD High Yield Corporate Bond Index maturing in one to three years would have generated gains of nearly 6 percent for the year, index data show.
Owning higher-quality bonds has been an important strategy for Bruce Simon, chief investment officer at Los Angeles-based City National Bank, which manages the Fixed Income Opportunities Fund. That’s because he says it’s still unclear whether the junk market’s recent deterioration is caused by fundamental credit weakness.
Although signs of improvement in the U.S. economy prompted the Federal Reserve to raise interest rates this month for the first time in a decade, Simon is looking for further evidence.
“High-yield certainly looks attractive, but we are moving up in quality and staying away from the worst-hit sectors until the recovery becomes more clear,” Simon said.
Michael Collins, who co-manages the $1.3 billion prudential fund, eked out a positive return this year by also steering clear of energy and commodity borrowers. Energy bonds plunged 19 percent, tracking the 31 percent collapse in crude.
A rebound like last week’s 10 percent jump in oil isn’t going to get Collins sniffing around energy credit anytime soon. After all, crude was the falling knife that wounded some of the biggest investors, like Franklin Advisers Inc. and Los Angeles-based Capital Group’s American High-Income Trust Fund.
"You could get an energy rebound at any point, but it doesn’t mean you should believe it," Collins said.
He may use the same template for next year, too, as investors including Jeffrey Gundlach, Carl Icahn and Wilbur Ross warn of more high-yield trouble ahead, with no signs pointing to an oil rally.
"The high-yield market isn’t short on drama," Collins said. "Avoiding the more highly levered and lower-rated credits alone played a big role in performance in 2015, and it’s not a bad strategy right now."