High yield fund
Interview: Touchstone High Yield Fund---White, Brendan---Fund Manager
>> welcome back. returns have been over 50% for most market indices. these returns have been driven by the lower quality sector which is up 30% year to date. we don’t think there is much room left for those types of bonds, those lower quality bonds to perform well. we think the balance of the year will be ar where you earn your return primarily through a yield. so we think you can earn hand some yields but we think the prospects for capital appreciation are pretty much behind us.
>> so don’t be consumed with price. take a look at yield and compare it to other options out there such as treasuries with their incredibly low yields right now and other things that may not yield quite as much. is that the idea here?
>> exactly. and given that, the return profiles high yield we think are still very attractive going forward. we think we can earn another 5% to 10% through the balance of the year. we think that will be a tough number to get in high grade market. be a very tough number to get in the treasury market. even in the equity market that will be a tough number to get without a lot of volitility. we think by earning yory yield in high yield for the balance of the year, you can earn a return that is very attractive, albeit not as attractive as the first half of this year.
>> give us a sense about why you have corporate and high yield spreads tighten so much recently.
>> sure, spreads have tightened dramatically this year in both high grade and high yield bonds. high yield bonds spreads are in 500, 600 basis points, so the yield has contracted versus treasuries by 5% or 6 percentage points. it’s been for two reasons. first of all, a lot of cash has come into the market. high yield mutual funds have been bringing in over a billion dollars a week into the market. this cash needs to find bonds to buy. this pushes the prices of bonds up. the question behind that is why is cash coming into the market. it’s primarily because i think people are getting comfortable with the prospects for an economic recovery. i think there would be―the recession is behind us. most market analysts think we have avoid today double dip recession and will have moderate growth going forward. this economic backdrop is very good for high yield companies as it allows them to grow out of their debt.
>> if that’s the situation many may be advised to go into equities thinking that’s where the appreciation is in the short-term. if you look at the high yield bonds you are recommending, you are looking at energy, healthcare, utilities, traditionally more defensive areas.
>> that’s a good point. in an economic recovery, stocks tend to do very well. and we expect the stocks will do well going forward. however, the recovery that we expect is a moderate one. a growth of 2%, 3% on g.d.p. we don’t think that that is enough of a growth prospect to propel stocks like you would see in a normal economic recovery, see it up 15%, 20% kind of years. so we are looking for moderate growth. we’d rather play it close to the vest, play it in high yield and play it consecutively. if we had expectations for a robust economic recovery, we would suggest a weightier allocation on equities, perhaps even lower quality high yield. given that our prospects for the recovery are somewhat moderate we think higher quality higher yield will perform very well.
>> give us the sense as far as what’s out there as far as energy, utility, healthcare high yield bonds.
>> as far as energy we have been very bullish on the natural gas companies such as chesapeake energy. these companies have done very well, margins are very strong in the natural gas market. we’ve been bullish on refiners such as te sorrow. in the utility sector, there is a new issue price by reliant resources just this week.
>> utility based in texas that has very strong operations. and we’ve been very constructive on that company and that sector as well. utilities, energy, healthcare, these are all sectors that are very detective. we think they are very appropriate for leverage and we think they make very good high yield core holdings.
