Should We In Good Conscience Consider Any Junk Bond Fund In This Environment?
Few.
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.
Amid the market turmoil that pulled the S&P 500 lower by 8% and tech stocks down by 16% at one point, the one sector that continues to hover near all-time highs is junk bonds. Even as credit spreads have widened substantially over the past couple weeks, high yield credit is currently less than 1% from its peak earlier this month. Even though junk bonds are considered more of a speculative asset class, they don’t seem to be responding in the way you might expect during a consequential risk-off shift. Investors have been ignoring the risks in the junk bond market for months, if not years, and it appears that the current environment is no different.
That could change quickly. While the markets (and the world) focuses on what’s happening in Japan, a global credit margin call could be the ultimate end game. And if junk bonds are starting from an historically narrow spread starting point, that could make the losses in this group even deeper than normal. This is perhaps the most mispriced area of the markets right now, which is why I want to take a look at the AllianceBernstein Global High Income Fund (AWF). It’s got a more diverse credit quality profile, which could help in a downturn, but this could eventually be a matter of choosing the best of a low potential bunch.
Fund Background
AWF seeks high current income and has a secondary goal of capital appreciation. It invests primarily (and without limit) in corporate debt securities from U.S. and non-U.S. issuers, as well as government bonds from both developing and developed countries. The fund takes a global multi-sector approach in order to achieve a favorable balance of risk and return potential compared with a single-sector portfolio. The portfolio’s risk level is adjusted depending on how well investors are being compensated and is reduced in times of caution.
I think the key takeaway here is that AWF is an all-credit quality portfolio (although it leans heavily into junk bonds). The added exposure of investment-grade bonds as well as the ability to invest around the world has the potential to reduce risk and add some downside protection. I do also like the flexibility that comes with the ability to adjust risk levels according to market conditions. This is a similar approach I use in my own risk rotation strategies and those have a long history of delivering above average returns if implemented effectively. Unfortunately, corporate credit as a whole is likely to get hit in a credit event, even the higher-grade notes.
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