Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
Even though high yield bonds represent (in my opinion) one of the riskier asset classes right now, there’s no question that they’ve been punching above their weight in 2023. Despite growing macro risks and the deterioration of several corporate metrics, junk bond spreads manage to continue declining and that’s juiced the returns of low-rated fixed income this year. I’m not convinced that this is the best time to be entering into or adding to junk bonds in your portfolio, but if you do so, I think it’s important to limit some of the risks of doing so.
The Western Asset High Yield Defined Opportunities Fund (HYI) offers a couple of potential risk mitigation factors that don’t actually have anything to do with the portfolio itself. Its underlying composition is fairly broad within the junk bond universe, but its lack of leverage and term structure could help in both reducing overall risk and providing some downside protection. If you’re looking to add a high yield to your portfolio via high yield bonds, this may be one of the more conservative ways to do it.
Fund Background
HYI’s primary objective is to provide high income with a secondary objective of capital appreciation. It does this by investing in a portfolio of global high-yield corporate fixed-income securities with varying maturities. The fund comes with a limited term structure that will liquidate on or about September 30, 2025.
As far as security selection goes, there’s nothing terribly unusual or exciting about the process. In its mandate, the fund is allowed to allocate up to 20% of assets into investment-grade securities and, as we’ll see in a moment, the managers do take advantage of that provision. Other than that, the management team simply tries to do deep research to find attractive opportunities.
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