Tag Archives: economy

5 Best Performing High Yield Mutual Funds Of 2015

Investors were lured to invest in high yield bond mutual funds following the financial crisis. And why not, as these funds were a better investment destination since there weren’t enough opportunities elsewhere to seek high yields. These funds provided better returns than those investing in securities with higher ratings, including government and corporate bonds. Also, due to their higher yield feature, these funds were less susceptible to interest rate fluctuations. High yield bond mutual funds provide the best choice for those looking to invest in below investment-grade bonds, also known as junk bonds. Talking of junk bonds, it surged an incredible 85% in 2011 since its Great Recession low and continued its winning run. However, in 2015, U.S. junk bonds registered their worst performance since 2008. Rate hike apprehensions throughout the year and finally the lift-off in December dealt a severe blow to these funds. Meanwhile, the weak Chinese economy raised concerns about future demand for oil, eventually dragging global oil prices down. This decline in oil prices also adversely affected junk bond funds. Activist shareholder, Carl Ichan, has tweeted: “Unfortunately I believe the meltdown in High Yield is just beginning.” Under such circumstances, investors may choose to stay away from high-yield mutual funds. Granted that the outlook is bleak, but still if you are a junk bond investor, we have presented those funds that have turned out to be the best gainers in 2015 despite several bottlenecks. These funds also possess a favorable Zacks Rank that should help these funds to continue gaining in 2016 as well. What Went Wrong for High-Yield Mutual Funds? In 2015, the high yield funds category lost an average 4.1%. Anticipation of a rate hike for the first time in nearly a decade and finally the Fed hiking its benchmark interest rates in December had a negative impact on the junk bond market. The Federal Reserve’s easy monetary policy for the last several years, which kept interest rates at record low, had been a boon for the junk bond market. Investors had flocked to this market in search of bigger payoffs. Following the Fed rate hike, net outflows from high-yield bond funds were $3.8 billion in the week ending Dec 16. It marked the third largest outflow on record and the largest since 2014, according to Lipper. During December, net outflows totaled $6.29 billion, higher than November’s net outflow of $3.3 billion. With this outflow, total outflow of high yield bond funds for 2015 came to $13.88 billion, with high-yield funds posting a negative flow in 7 out of 12 months of 2015. The adverse effect could easily be spotted when New York-based Third Avenue Management blocked investors from redeeming money from the near $1 billion Third Avenue Focused Credit Fund (MUTF: TFCVX ) last December. The failure and the embargo on investors on withdrawals also highlighted the concerns related to liquidity in corporate bond markets. The continuous slide in commodity prices also affected junk bond funds. Decline in commodity prices means that energy and material companies may soon have trouble repaying their debts, as they constitute a major portion of the high-yield bond market. Fears about economic slowdown and market volatility in China were instrumental in the plunge in commodity prices. Fed Rate Hike Through 2015, Fed rate hike expectation kept high-yield funds under pressure. Ultimately, on Dec 16, the Fed raised its key interest rate for the first time in nearly a decade. The Fed increased its short-term borrowing rate to a range of 0.25% to 0.50%. Meanwhile, the Fed stressed that the pace of rate hikes will be ‘gradual’ in nature. The junk bond market had been a strong beneficiary of low interest rate and capital had flowed strongly into the debt sector. However, the lift-off spooked investors and they started exiting junk bond positions. Weak Chinese Economy and Oil Price Slump China’s economy and financial markets suffered for a large part of 2015. Economic data remained weak through the year though markets soared during the first half of 2015. Ultimately, markets crashed over a two and a half month period, erasing nearly $5 trillion in value terms. A bubble had built up steadily and valuations had hit levels which were difficult to justify. Weak Chinese economic data raised concerns about decelerating growth in the world’s second largest consumer of oil, which eventually dragged oil prices down. Additionally, persistent supply glut and a stronger dollar also adversely affected oil prices. Price of a barrel of U.S. crude was down more than 30% in 2015 from year-ago levels. Meanwhile, the U.S. economy hardly helped high yield funds in 2015. For the first three months, it expanded at an annual rate of 0.6%. The growth was mostly affected by harsh winter weather and disruptions in West Coast ports. However, the economy picked up pace in the second quarter, gaining 3.9%, but slowed down to a gain of 2% in the third quarter. Best Performing High-Yield Mutual Funds in 2015 In 2015, the junk bond market had a torrid ride due to decreasing liquidity within and rising borrowing costs. Moreover, concerns about junk-rated energy and material companies’ ability to repay debts due to fall in commodity prices continued to weigh on junk bonds. As declines outweighed gains, the funds finishing in the green could post only modest gains. Below we present the best-performing high yield mutual funds of 2015, which are under Zacks Mutual Fund coverage. We have considered those funds that have a minimum initial investment of $5000 and net assets over $50 million. From the above list, we present the top five best-performing high yield mutual funds of last year. These funds also possess a relatively low expense ratio and boast a Zacks Mutual Fund Rank #1 (Strong Buy). The Aquila Three Peaks High Income Y (MUTF: ATPYX ) seeks high current income. ATPYX invests a large portion of its assets in income-producing securities. Its portfolio includes high-yield/high-risk securities rated below investment grade. ATPYX currently carries a Zacks Mutual Fund Rank #1. ATPYX’s 3-year and 5-year annualized returns are 3.6% and 4.8%, respectively. Annual expense ratio of 0.94% is lower than the category average of 1.06%. The Buffalo High-Yield Fund (MUTF: BUFHX ) invests a major portion of its net assets in higher yielding, higher-risk fixed income securities. BUFHX currently carries a Zacks Mutual Fund Rank #1. BUFHX’s 3-year and 5-year annualized returns are 4.1% and 5.2%, respectively. Annual expense ratio of 1.02% is lower than the category average of 1.06%. The Credit Suisse Floating Rate High Income Fund (MUTF: CHIAX ) seeks high current income. CHIAX invests in a diversified portfolio of high yield and high risk fixed income securities (junk bonds). CHIAX currently carries a Zacks Mutual Fund Rank #1. CHIAX’s 3-year and 5-year annualized returns are 2.3% and 4%, respectively. Annual expense ratio of 0.95% is lower than the category average of 1.07%. The Wells Fargo Short-Term High Yield Bond Fund (MUTF: SSTHX ) seeks total return and invests primarily in medium and lower quality corporate debt obligations. SSTHX currently carries a Zacks Mutual Fund Rank #1. SSTHX’s 3-year and 5-year annualized returns are 1.9% and 3.1%, respectively. Annual expense ratio of 0.81% is lower than the category average of 1.06%. The MassMutual Premier High Yield Fund (MUTF: MPHZX ) seeks to achieve a high level of total return and mostly invests in high yield debt and related securities. MPHZX currently carries a Zacks Mutual Fund Rank #1. MPHZX’s 3-year and 5-year annualized returns are 3.8% and 10.1%, respectively. Annual expense ratio of 0.55% is lower than the category average of 1.06%. Link to the original post on Zacks.com

It’s Not Possible For A New Understanding Of How Stock Investing Works To Become Popular Without People Losing Confidence In The Old Understanding

By Rob Bennett Valuation-Informed Indexing is the future. Buy-and-Hold is the past. Or at least so I believe. But as of today, Buy-and-Hold is far more popular. About 80 percent of stock investors do not believe it is necessary for them to change their stock allocations in response to big valuation shifts. Another 10 percent see the merit of the idea, but are reluctant to adjust their allocations too much, because few investors do this, and they see risk in going against conventional opinion. About 10 percent follow a Valuation-Informed Indexing strategy. I want to spread the word about the new model, which I view as the first true research-based strategy (because Shiller’s 1981 finding that valuations affect long-term returns discredited the belief rooted in Fama’s research that the market is efficient). So I need to point out the dangers of Buy-and-Hold. I wish it weren’t so. I greatly admire the Buy-and-Hold pioneers. I buy into all of their beliefs except for the one about there being no need for investors to take price into consideration when buying stocks. Moreover, the 80 percent who believe in Buy-and-Hold are offended when I find fault with the strategy. If there were some way to make the case for Valuation-Informed Indexing without criticizing Buy-and-Hold, I would win over a lot more people and encounter a lot less friction as a result of my efforts to do so. It can’t be done. Fama said the market is efficient. That means stocks are always priced properly. Buy-and-Holders often object to that statement. They say an efficient market is just one in which all available information is incorporated into the price, but the price that results is not necessarily the right one. That’s a hyper-technical distinction. If the market price incorporates all known information, the market price is as close to perfect as it could possibly get. Buy-and-Holders are essentially saying the market price is always right. If the market price is always right, indicators of overvaluation and undervaluation are meaningless. Buy-and-Holders don’t consider valuations when buying stocks for a logically sound reason. They don’t believe valuation metrics tell us anything. According to the Buy-and-Hold model, the P/E10 value is noise. Shiller showed the P/E10 value is not noise. It effectively predicts long-term returns. By undermining the foundational belief of the Buy-and-Holders, Shiller turned our understanding of how stock investing works on its head. It’s not true that stocks are risky; the risk largely goes away for investors who take valuations into consideration when buying stocks. It’s not true that the safe withdrawal rate is the same number for all retirees; the safe withdrawal rate is a number that ranges from 1.6 percent when stocks are priced as they were in 2000 to 9 percent when stocks are priced as they were in 1982. It’s not true that bad economic times cause stock crashes; stock crashes become inevitable once overvaluation gets too out of control and the losses experienced in the crashes cause consumer spending power to dry up and the economy to falter. Shiller’s finding is all positive. It’s like the discovery of electricity; it leaves us all big winners. But it represents a big change. Shiller’s finding will eventually take us to a very good place, but starting a national debate regarding the implications of his finding has been a disruptive experience. How people invest to finance their retirements is an important and sensitive matter. Telling people they got it all wrong upsets them. People want to move forward in their understanding. But it hurts them to let in the knowledge that they could have earned higher lifetime returns at less risk had they caught on to the significance of the Shiller revolution earlier in life. The normal way for a new idea to catch on is through exposure in the marketplace of ideas. When the Beatles showed up on the Ed Sullivan show with their long hair, a debate was launched as to whether it was okay for men to wear their hair at that length. Arguments were advanced from both sides of the divide in opinion. Eventually, a resolution was reached in the minds of most people. The Beatles won that one (for the most part, but not entirely). Most people of today find long hair acceptable on men. The big problem in the investing realm is that the debate has not yet been successfully launched. People who believe valuations matter keep quiet about it when they are speaking in the presence of Buy-and-Holders. It is viewed as rude to mention how dangerous Buy-and-Hold will prove to be if it turns out Shiller really is on to something. There’s no way to know for certain that Shiller is right. The historical data supports him. But data from earlier times can be dismissed on the grounds that the economic conditions under which that data was produced no longer apply. And the data from the time of Shiller’s finding until today is inconclusive. From 1981 forward, Buy-and-Hold has performed slightly better than Valuation-Informed Indexing. Valuation-Informed Indexers say that’s because stock prices are high today; Valuation-Informed Indexing will be revealed as the superior strategy with the next price crash, which is inevitable, according to the Shiller model. But that way of thinking about things begs the question: to say Valuation-Informed Indexing will prove superior because today’s valuations will produce another crash is to say Valuation-Informed Indexing will prove superior once again because Valuation-Informed Indexing has always been superior. The crash hasn’t come yet. So we don’t know for certain. To be fair, the Buy-and-Holders are begging the question too. They say we cannot know that another crash is coming soon, because the market is efficient and returns are thus not predictable. All of the beliefs of those following both strategies follow from their core premises. If the market is efficient, Buy-and-Hold is the ideal strategy. If valuations affect long-term returns, Buy-and-Hold is dangerous. I believe I need to point that out to my Buy-and-Hold friends. I don’t want to hurt their feelings. I want them to consider what might happen to their retirement portfolios if it turns out Shiller is right. I criticize their strategy not to upset them, but to alert them to a new way of thinking about how stock investing works that I strongly believe we all need to know about. Disclosure: None.