After a tough first half for the bond market, there could be some value for savvy investors to hit, including high-yield opportunities.
Getting in the way of more capital in the high-yield bond market is, of course, recession fear. Aggressive tightening by the Federal Reserve could certainly force this hand, but after a strong sell-off in the first half of 2022, high yield could be valuable.
“US corporate bonds are posting one of their worst sales since the financial crisis and could deteriorate further if recession forecasts prove accurate,” Jonathan Levin wrote in the Washington Post. “But with junk-rated bonds yielding around 8.6%, taking a flyer on a diversified basket of securities wouldn’t be out of the question. At these levels, the risks actually seem somewhat balanced.
For investors who remain on the fence when it comes to high yield, there are options available to make the alternative less daunting.
An active solution with high performance
One way to approach the high yield debt market is to opt for an active management strategy. This essentially puts the selection of high-yield debt securities in the hands of professionals, as opposed to stand-alone investors or advisors doing the work themselves.
All of this can be achieved with an active exchange-traded fund (ETF) like the American Century Select High Yield (AHYB), which has an expense ratio of 0.45%. The fund actively invests primarily in BB- and B-rated debt securities with the aim of achieving high current income and risk-adjusted returns.
The fund itself is under-advised by an experienced team from Nomura Corporate Research and Asset Management, a firm that has specialized in the high yield market since its inception in 1991. According to the fund’s product website, the managers apply a process intensive research. which seeks to identify companies that they believe can:
- Carry debt loads through market cycles
- Generate sustainable cash flow
- Decrease leverage on their balance sheets in pursuit of higher ratings
To break into its diverse range of securities, the fund uses a top-down macro overlay that establishes duration and rating distribution. Next, sector allocations are determined by bottom-up stock selection.
Of course, it’s hard to talk about high yield without actually providing the fund’s income potential. As of June 30, the fund had a yield of approximately 7.39%, with debt securities having an average duration of approximately 4.3 years.
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