The Ultimate Contrarian Play

Depending upon who you listen to, we are either in a recession, or one is gathering on the horizon. (The Fed's Beige Book says no recession just slower growth.) Either way, it takes a brave investor to start taking stakes in high-yield bond funds, better known as junk funds. Some investors worry about a repeat of the market downturn that began in 2000. In that year, high-yield funds lost 7.1 percent.

Depending upon who you listen to, we are either in a recession, or one is gathering on the horizon. (The Fed's Beige Book says no recession — just slower growth.) Either way, it takes a brave investor to start taking stakes in high-yield bond funds, better known as junk funds. Some investors worry about a repeat of the market downturn that began in 2000. In that year, high-yield funds lost 7.1 percent. As junk issuers collapsed, the default rate soared, peaking at more than 8 percent in 2002. But in the current cycle, defaults are unlikely to reach such high levels, says Mark Vaselkiv, portfolio manager of T. Rowe Price High Yield. Vaselkiv says that during the Internet bubble, the high-yield market included many telecommunications issues from companies that had little or no earnings. This time, companies in relatively steady sectors such as energy, health and utilities dominate high-yield markets. “The high-yield universe has many profitable issuers that should be able to weather a downturn,” Vaskelkiv says.

JUNK FUNDS WITH QUALITY RECORDS
Fund Ticher Three-year return % category rank three-year return Maximum front-end load
American Funds High Income A AHITX 7.5% 16% 3.75%
Eaton Vance Income Boston A EVIBX 7.5 16 4.75
Fidelity High Income SPHIX 6.7 26 0
Metropolitan West High Yield MWHIX 6.4 44 0
T. Rowe Price High Yield PRHYX 6.9 28 0
Source: Morningstar. Returns through 10/31/07.
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