High-Yield Funds Place Different Bets on Energy Bonds
Positioning within the energy sector will play a major role in how these funds will perform in 2015.
Positioning within the energy sector will play a major role in how these funds will perform in 2015.
Sumit Desai: After a strong couple of years, the high-yield bond category had a difficult 2014. The category barely squeaked out a gain for the full year, and these calendar results do not tell the full story for the category. Most high-yield bonds declined in the second half of 2014, wiping out the gains from the earlier part of the year.
This decline was driven largely by plunging oil prices, which caused energy-related high-yield bonds to decline almost 13% in the last six months. Energy companies borrowed heavily in the past few years, taking advantage of new drilling opportunities and low interest rates. Just as homeowners borrowed against inflated home prices during the financial crisis, energy companies borrowed this money assuming oil prices would remain above $100 per barrel.
Certainly, this sell-off has created some opportunities. The broad high-yield market is now yielding close to 7% and high-yield energy bonds are yielding almost 10%. However, with oil prices now around $40 per barrel, many overleveraged energy companies face a very realistic risk of default. For this reason, positioning within the energy sector will play a major role in how these funds perform in 2015, and security selection will be of the utmost importance going forward.
Across our rated funds, examples of funds with above-average energy stakes as of their most recent reporting dates include Janus High-Yield (JHYAX), Neuberger Berman High Income (NHINX), Franklin High Income (FHAIX), and Western Asset High Yield (WAYAX). These funds performed poorly last year but could benefit if energy-related bonds rebound.
On the other hand, funds that tend to underweight energy bonds include ones like Lord Abbett High Yield (LHYAX), PIMCO High Yield (PHDAX), and Fidelity High Income (SPHIX). These funds have been bearish on energy bonds and have benefited on a relative basis due to their positioning. If defaults rise, these funds would benefit due to the underweight. However, if the bonds rebound, these funds might not participate in that upside.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.