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By Sumit Desai, CFA | 07-24-2014 11:00 AM

Solid Options Still Remain in High-Yield Market

Despite muted expectations for the high-yield space, Morningstar analyst Sumit Desai identifies two solid funds for investors seeking exposure.

Sumit Desai: High-yield bonds are at the crossroads between fixed income and equities. Historically, this space has shown a higher correlation to equities, but recently many fixed income investors have been looking to the high-yield space for higher yields and income. Over the past 12 months, over $18 billion has flown into this space and has driven strong returns. Over the past five years, the category has returned, on average, an 11.8% annualized return. Year to date, the category has returned 4.4%.

Going forward, we think investors should have muted expectations for this space. The strong demand has driven valuations--as measured by absolute yields and spreads over Treasuries--to near all-time lows, leaving little room for upside going forward. The corporate fundamental outlook remains strong, and companies should be able to make their interest payments without any problem. That being said, any change to this economic outlook could have a pretty sizable negative impact on the category.

Two Morningstar Medalist funds in this space include Fidelity High Income, which has a Morningstar Analyst Rating of Gold, and Neuberger Berman High Income, a Silver-rated fund. Fidelity High Income has a proven track record of navigating through past financial crises like the 2008 credit crisis. This fund also displays low fees.

The Neuberger Berman High Income Fund has a solid approach, using a team-based fundamental analysis that is highly repeatable. While we maintain modest return expectations for this space, investors who want exposure to high-yield bonds should consider these funds with good managers that can help navigate through a full credit cycle.

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