Much has been written in the past few days since the fate of Third avenue's junk bond fun hit the news. No doubt there will be some ripples. But it obviously begs to be or not to be question for many investors: stay or be gone?
Here's an excerpt from the recent issue of Barron's on the matter you might find interesting. Our view is best answered with a question: How good is your sniffer?
These are scary times for junk-bond investors. Not only are the bonds falling in price as commodities slump and the Federal Reserve prepares for liftoff, but tax-loss selling and large redemptions in junk-bond funds are dragging down prices further.
Investors saw one of their worst fears realized Thursday when an especially risky, money-losing, high-yield fund facing a wave of redemptions announced it is liquidating. Only by blocking the exits and setting up an orderly process for selling highly illiquid holdings does the Third Avenue Focused Credit Fund stand a chance of returning reasonable amounts of cash to investors.
Friday junk-bond exchange-traded funds, like iShares iBoxx $ High Yield Corporate Bond (ticker: HYG) fell (along with crude oil and equities) an extra-steep 2%, the worst day in more than four years. Year-to-date, the high-yield sector is down some 6%, with 3% of the loss coming in December alone.
Investors who didn’t know what they were getting into when they bought pleasant-sounding high-yield funds, may want to scale back as selling pressures intensify.
Those with long time horizons and risk appetites may find opportunity in select issues. Yields,
Investors who didn’t know what they were getting into when they bought pleasant-sounding high-yield funds, may want to scale back as selling pressures intensify.
Those with long time horizons and risk appetites may find opportunity in select issues. Yields,
especially in low, triple-C bonds, are in the high teens. “The opportunity is in the lower-quality paper where there is not a lot of liquidity,” says high-yield analyst Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors. In contrast, prices of bonds just below investment grade have improved in recent months, but they aren’t that cheap, he says.
“I wouldn’t be rushing in,” says Fridson, who expects more mutual fund outflows to pressure the sector following Third Avenue’s “unprecedented” fund liquidation. “You’d have to be awful nimble and maybe lucky to take advantage of these short-term moves.” His model shows the sector will average 3.4% annual returns for the next five years—well below coupon rates. There will be some big price swings within that long-term forecast.
“I wouldn’t be rushing in,” says Fridson, who expects more mutual fund outflows to pressure the sector following Third Avenue’s “unprecedented” fund liquidation. “You’d have to be awful nimble and maybe lucky to take advantage of these short-term moves.” His model shows the sector will average 3.4% annual returns for the next five years—well below coupon rates. There will be some big price swings within that long-term forecast.
Art DeGaetano, chief investment officer at Bramshill Investments, is among those sniffing for opportunity, but he’s avoiding energy-related names. “We would need to see a fairly decent repricing for us to get involved in some of the sectors that have really started to break down,” he says.
barrons.com/articles/high-yield-hang-in-or-bail-out
barrons.com/articles/high-yield-hang-in-or-bail-out
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