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Finding the Right High-Yield Bond Fund

Our Premium Fund Screener zeroes in on some of the category's best.

Though the stock market has been perking up of late, fixed-income investments are still grabbing lots of headlines. A recent Wall Street Journal article asked "Why Are Bonds Still So Hot?," for example, and last month BusinessWeek pondered the "Mad Scramble for Higher Yield"

But no investment decision should be a "mad scramble" for a "hot" asset class. Performance-chasing is a race most investors lose, after all. The far better tack is to determine whether or not a particular asset class has a role to play in the context of your overall portfolio. That's especially true when it comes to one of the fixed-income universe's raciest vehicles, high-yield bonds.   

High-yield debt--defined as bonds whose credit rating is BB or lower--is notoriously volatile, generally correlated as it is to both improving economic conditions and the strength of the stock market. Last year turned out to be a merely disappointing year for the category, for instance, but until equities rallied during the fourth quarter, the average high-yield bond fund was poised to finish 2002 with its worst showing in more than a decade. And in 2000, the year the stock market began to crater, the peer group's typical entrant shed 7.5% of its value. Not for nothing, in other words, is high-yield debt also known as junk bonds.

That said, for risk-tolerant investors willing to trade volatility for potentially outsized gains, a high-yield-bond fund could be just the thing for a small portion of their portfolios. As my colleague Bradley Sweeney recently pointed out, however, high-yield funds come in many flavors. Some investors may prefer the relative caution of a fund like PIMCO High Yield (PHDAX), which holds a decent slug of investment-grade bonds to offset the inherent riskiness of its junk portfolio. Aggressive types, meanwhile, might like  Fidelity Advisor High Income Advantage (FAHYX), which sports a hefty commitment to highly speculative (and, therefore, higher-yielding) debt issues.

But with so wide a spectrum, how can an investor zero in on the high-yield fund flavor of her choice?

That's where our  Premium Fund Screener comes in. This week, we'll narrow the universe of high-yield offerings to those funds whose managers have stood the test of time and whose expenses fall below the category average. We'll also look for relatively moderate offerings, focusing on just those funds whose average credit quality is BB. (The high-yield category norm is B.)

Click here to run this screen yourself.

And there you have it--a short list funds that should help kick-start your research. And don't forget: You can save this screen and tweak its criteria to suit your goals and risk tolerance. To generate a longer list that includes racier fare, for instance, you could look for funds with an average credit quality of BB or lower

In the meantime, here are some analysis highlights from the funds that passed our screen.

 Buffalo High-Yield  (BUFHX)
This fund's terrific track record is proving that manager Kent Gasaway is a threat from both sides of the plate. Gasaway has already earned accolades at his other pure-equity charge,  Buffalo Small Cap (BUFSX). This fund's peer-busting returns and below-average volatility add another feather to his cap.

 T. Rowe Price High-Yield  (PRHYX)
This fund's emphasis on diversification helps to limit risk. Still, like other junk-bond funds, it can suffer when the economy slows.

 Vanguard High-Yield Corporate  (VWEHX)
This fund stays in the shallow end of the high-yield pool. It doesn't take on as much credit risk as its typical peer, so volatility is relatively mild. Low costs have given it that luxury. All told, its cautious tack has translated into solid returns without the risk, making it a good option for investors seeking a moderate way to play the high-yield sector.

Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.