11
Morningstar FundInvestor
May 2
014
No fund strategy can succeed in every market envi-
ronment, but investors who know what to expect
can put inevitable slumps to good use by adding to
(or at least just sticking with) their underachievers.
Recent history underscores the virtues of patience:
The funds that soared highest during
2009
’s risk
rally, after all, typically ranked among their catego-
ries’ laggards during
2008
’s stampede into quality.
The Medalists below placed in the bottom half of
either the high-yield bond or bank-loan categories in
2008
but fared much better in
2009
. Particularly
in the case of the two high-yield funds, that perform-
ance was largely predictable. Plenty of credit risk
comes baked into their category, but those funds
haven’t just courted that risk, they’ve embraced it:
Historically, their managers have been more willing
than most to step down the credit-quality ladder.
It was no surprise, then, that when capital markets
froze during
2008
’s credit crunch, these funds
suffered more than most. More than five years into
a rally that’s been especially favorable for riskier
fare, investors shouldn’t just be prepared for a pull-
back, they should be prepared to make the most of it.
Eaton Vance Income Fund of Boston
EVIBX
This Silver-rated high-yield-bond fund’s
30
.
3%
loss
in
2008
landed in the category’s bottom quintile,
dragged down by an overweight slug of B rated bonds.
Amid tough economic times, generous exposure
to hard-hit leisure-industry debt also dinged results.
Comanagers Mike Weilheimer and Tom Huggins
stuck to their guns throughout that period, and inves-
tors who stuck with them were compensated for
their patience. In
2009
, a
57%
gain placed just outside
the peer group’s top decile. In the trailing five-year
period through March
2014
—a stretch that captures
the high-yield market’s dramatic recovery off
2008
–
09
lows—an annualized gain of
17
.
3%
ranks in
the top quartile.
Huggins left the team in
2012
, a year in which Weil-
heimer (in place here since January
1996
) turned
relatively cautious and, perhaps not coincidentally,
the fund turned in its first subpar year since
2008
.
And while it placed in the category’s top quartile in
2011
, the fund shed
5
.
7%
during that year’s third
quarter, the toughest “stress test” high-yield has
faced since March
2009
.
Fidelity Capital & Income
FAGIX
Managed since
2003
by Mark Notkin, this Silver-rated
high-yield bond fund is super aggressive. Versus a
category norm of less than
2%
, its current equity stake
hovers near
19%
. And while its allocation to
CCC
rated bonds isn’t especially high right now, Notkin
has been willing to invest significantly in them in
the past.
The fund’s returns have been nearly as predictable
as its volatility. Like Eaton Vance Income Fund of
Boston, it placed in the category’s bottom quintile in
2008
with a loss of
31
.
9%
. It shed
10
.
8%
in
2011
’s
third quarter, too. During
2009
’s junk rally, though, the
fund sailed past not only the Eaton Vance fund but
also virtually all category rivals, securing a spot in the
peer group’s top percentile with a gain of
72%
.
Eaton Vance Floating Rate
EVBLX
This Gold-rated fund strikes a milder profile than most
of its bank-loan category peers. It still slipped into
the category’s bottom half in
2008
, though, suffering
a loss of
30
.
4%
. And while it outperformed most
peers in
2011
’s third quarter, the fund shed
3
.
1%
of its
value nonetheless.
More worrisome is the pace of inflows for the broad
bank-loan category; amid investors’ mad scramble
for yield, assets rose to $
145
billion from $
87
.
8
billion
in the trailing
12
months through March
2014
. When
the market corrects, this fund will probably fare better
than most. It likely won’t escape unscathed, though.
œ
Contact Shannon at
Good Funds With Big Credit Risks
Red Flags
|
Shannon Zimmerman
What is Red Flags?
Red Flags is designed to alert
you to funds’ hidden risks. Such
risks can take many forms,
including asset bloat, the depar-
ture of a solid manager, or a
focus on an overhyped asset
class. Not every fund featured in
Red Flags is a sell, and in fact,
some are good long-term hold-
ings. But investors should be
prepared for a potentially bum-
pier ride in the near future.
