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By Andrew Gogerty | 11-30-2009 05:42 PM

Approach and Avoidance in High Yield

Janus' Gibson Smith says we've entered a phase where security selection is vitally important.

Andrew Gogerty: Hi, I'm Andrew Gogerty with Morningstar. Joining me today is Gibson Smith, co-CIO of Janus, and portfolio manager of the firm's fixed income strategies. Gibson, thank you for joining me today.

One of the areas I thought would be important to start is the rally in high-yield this year. Obviously, you know, from a mutual fund perspective, the returns are just enormous. And I wanted to get your perspective on that--just considering what happened last year. Is it truly just a bounce back from last year, or are fundamentals in these companies truly improving this quickly?

Gibson Smith: Yeah, great, great topic. 2008, obviously a very difficult year for high-yield and a nice recovery in 2009. We spent a lot of time decomposing the returns in the high-yield market on a year-to-date basis. And what we've seen is a real low-quality, high-beta rally in the high-yield market, where the companies that perform the worst in 2008 have generally been the best performers in 2009.

That has been a significant portion of the rally year-to-date. When you look at the return profile breakdown, triple Cs, the riskiest part of the high-yield market, are up about 82% year-to-date--so really, generating a majority of the returns in the high-yields space on a year-to-date basis.

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