10 Top High-Yield Funds With Low Risk

BOSTON (TheStreet) -- Investors have poured money into high-yield bond funds at a record pace this year as they seek less-risky alternatives to the volatile stock market while getting better returns than those of other fixed-income securities.

Inflows into high-yield bond mutual funds this year totaled $22 billion through June 8, more than four times during the same period last year, according to EPFR Global. In 2010, inflows were $31.5 billion, shy of the record $31.8 billion in 2009.

Cameron Brandt, director of research for EPFR Global, told TheStreet that new investments in high-yield bond funds "have been driven by the desperation for yield.

And that isn't going to go away," given the miniscule returns now being offered by Treasuries, money-market accounts and certificates of deposits.

Benchmark Treasury securities dropped to less than 3% last week on signs the U.S. economy is weakening. The jobless rate rose in May, and consumer spending is still lackluster as housing prices extend their declines.

Still, recent economic uncertainties have given investors pause. There has been a decline in inflows over the past few weeks and a week of outflows.

There are concerns due to the scheduled expiration of the Federal Reserve's QE2 program at the end of the month and sovereign debt problems boiling in Europe, as well as concerns over the health of the economy at home and its potential impact on high-yield bonds, which used to be known as "junk" bonds.

High-yield bonds have a history of providing much better returns than most other fixed-income investments because of their perceived higher "risk" of default, that is, their ability to continue to make scheduled payments.

But Brandt said junk bond default rates "are still really pretty low, much lower than it was expected they would be," even when the economy struggled over the previous 2 1/2 years.

But it's not all bullish in the sector as several years of strong appreciation for these bonds means they are fully priced and returns are likely to start flattening.

As a rough measure of performance, the SPDR Barclays Capital High Yield Bond Index ETF, an exchange traded index fund, has a current yield of 8.3%, and a total return of 2.4% this year and 16.4% over the past 12 months. It has an average annual return of 7.4% over three years.

The S&P 500 Index is up 2% this year, including a loss of 2% over the past three months. It has risen 19% over 12 months, but flat over the past three years.

What follows is a list of 10 bond funds that have records of producing strong, steady returns and that have received at least three stars out of a possible five from ratings firm Morningstar for their management's performance.

The returns cited include changes in share price and reinvestment of dividends and capital gains, if any.

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The Fidelity Capital & Income Fund ( FAGIX), with assets of $11 billion, has a five-star rating from Morningstar.

With a current yield of 6.09%, the fund has a total return of 4.3% this year, and 20.7% over the past 12 months. It has a 10-year average annual return of 10.2%.

Its portfolio is primarily made up of 81% U.S. corporate bonds and 17% foreign corporate bonds.

"This opportunistic high-yield bond fund typically takes on more risk than its average category peer," Morningstar analysts say. "Management often dabbles in distressed securities and equities while primarily focusing on bonds rated B. The fund's equity stake has ranged as high as 20% of assets. It will also own bank loans."


The Metropolitan West High Yield Bond Fund ( MWHYX), with $2.3 billion in assets, gets a five-star rating from Morningstar.

It carries a 7.5% yield and is up 4.5% this year, and 16.2% over the past 12 months. It has a five-year average annualized return of 9.5%.

The fund is 86% U.S. corporate bonds and 7% foreign corporate bonds. It has a relatively low 34% annual portfolio turnover.

Manager Jamie Farnham and his team have been in place since 2002.

Morningstar analyst Miriam Sjoblom wrote in an April 21 research note that "like other high-yield bond funds, this one invests heavily in bonds rated BB and below. Bottom-up analysis lies at the heart of its process. Management attempts to limit the fund's downside risk by looking closely at asset value, cash flow and seniority in evaluating specific issues.

"However, it also makes top-down adjustments based on its outlook for interest rates and the overall bond market. This flexible approach has fared well in a variety of market conditions," she said.

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The T. Rowe Price High Yield Fund ( PRHYX), with $8.5 billion in assets, has a five-star rating from Morningstar.

It carries a 7.5% yield and has a total return of 4.7% this year and 17.6% over the past 12 months. It has a 10-year annualized return of 8.2%.

Its portfolio is comprised of 86% U.S. and 13% foreign corporate bonds.

Mark Vaselkiv took over as manager in 1996 and, since then, the fund has outpaced its typical peer by nearly 2 percentage points annually.

Morningstar analyst Kathryn Young said in a February research note that "the fund usually has less exposure to the lowest-rated bonds than its typical peer and it stays well diversified across issuers and industries. Positions are rarely larger than 2% and most are less than 1%. This approach has achieved its goal thus far; the fund has lost less than its average peer in down markets."


The Fidelity High-Income Fund ( SPHIX), with assets of $4.8 billion, gets a four-star rating from Morningstar.

It has a yield of 6.9% and a total return of 4.4% this year and 17.3% over the past 12 months. It has a 10-year average annual return of 8%.

It is 88% U.S. corporate bonds and 11% foreign corporate bonds. Portfolio turnover is 65%.

Fred Hoff has been its manager since June 2000.

Morningstar analysts say Hoff is a bottom-up bond-picker and, "rather than attempt to time the market's twists and turns, he aims to identify companies with the means to improve their balance sheets over the next two or three years."

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The Transamerica Partners High Yield Bond Fund ( DVHYX), which gets a four-star rating from Morningstar, has a yield of 9.4% and a total return of 4.7% this year and 17.3% over the past 12 months.

It has a 10-year average return of 8.3%.

The $114 million fund has been managed by Linda Carter and Michael Weilheimer since June 2000.

The fund holds 85% U.S. corporate bonds and 14% foreign corporate bonds.

Expenses are 1.1%, which is relatively high in comparison to its peers, and it requires at least $5,000 for an initial investment.


The Janus High-Yield Fund ( JAHYX), a conservatively managed fund, gets a four-star rating from Morningstar.

The $2 billion fund has a 7.06% yield, and has a total return of 4.1% this year and 18.4% over the past 12 months. Its 10-year annualized return is 7.6%.

Expenses are 0.86%, and the minimum initial investment is $2,500.

Its portfolio, which has an annual turnover of 91%, is made up of 88% U.S. and 11% foreign corporate bonds.

Gibson Smith has been its lead manager since December 2003.

Morningstar analyst Kathryn Young said in a research note that the fund is made up primarily of "bonds issued by firms that generate solid free cash flow and are improving the quality of their balance sheets. As a result, the fund's credit-quality profile rarely strays far from the category norm" and its conservative posture buoyed the fund in 2008; its 19% loss was 7 percentage points less than its typical peer's."

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The Vanguard High Yield Corporate Bond Fund ( VWEHX), which gets a three-star rating from Morningstar, has $13.8 billion in assets and sports a 7.1% yield.

The fund, managed by Michael Hong since February, 2008, has a total return of 5% this year and 16.6% over the past 12 months. It has a 10-year annualized return of 6.4%.

The portfolio is 82% U.S. and 14% foreign bonds and it holds 2.5% U.S. Treasury bonds.

"This fund is primarily focused on delivering a steady income stream without taking outsized credit risks," says Morningstar analyst Andrew Gogerty, in a recent research note. "Management invests mainly in higher-quality junk bonds."

It has a very low expense ratio of 0.25%, among the cheapest in its category. The minimum initial investment is $3,000.


The Wells Fargo Advantage High Income Fund ( STHYX), which gets a three-star rating from Morningstar, has $746 million in assets.

With a yield of 6.76%, it has a return of 4.8% this year and 17.3% over the past 12 months. It has a 10-year annualized return of 6.2%.

Thomas Price has been its lead manager since 1998.

Its portfolio is made up of 89% U.S. corporate bonds and 10% foreign corporate bonds.

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The Western Asset High-Yield Fund ( WAHYX), a $585 million fund with a three-star rating from Morningstar, has a 8.9% yield, and a total return of 6% this year and 20% over the past 12 months.

It has a five-year average annual return of 8%. Annual expenses are 0.65%.

Michael Buchanan began managing the fund in February 2006.

The minimum initial investment is $1 million.

The portfolio, 85% U.S. corporate bonds and 15% foreign corporates, has an annual turnover rate of 105%.


The PIMCO High Yield Fund ( PHYDX) gets a three-star rating from Morningstar.

The $12.5 billion fund has a yield of 6.9% and total return of 4.3% this year and 15.8% over the past 12 months. It has a 7.3% average total return over the past 10 years.

It carries an expense ratio of 0.9% and has an annual portfolio turnover of 36%.

The portfolio is made up of 78% U.S. corporate bonds, 13% foreign corporate, 3% mortgage obligation bonds, 2.3% foreign government bonds and 2% asset-backed bonds.

Andrew Jessup has been fund manager since January 2010.

Morningstar analyst Miriam Sjoblom said in an April 29 research note that the fund generally buys no bonds rated below B, and the portfolio includes "slightly higher-quality BB (rated bonds) and (it) has even been known to stash 30% or more in the investment-grade arena."

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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