Fidelity High Income Fund - Should I fear?

[Budman]

I invested approx. 25% of my porfolio in a high yield bond fund (Fidelity High Income (SPHIX)) 6 months ago. During that time the fund value has increase 7.8% while returning approx. 10% on an annualized basis. I am impressed and I am getting addicted. The fund has over 370 different company bond holdings thereby spreading risk for defaults. I keep thinking this is too good to be true.

I want to know why should I fear this investment.

 

[dex]

Two things I think you need to research.
1. How does it trade versus stocks - look at the charts - same as or different?
2. What is the interest rate spread versus compritable length US government bonds? Is the risk justified?

Let us know what you find out.

 

[clifp]

I think Morningstar analyst is worth reading
http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=SPHIX

Bottom line the interest rate spread between high credit bonds and junk bonds is very low by historical standards.

 

[Budman]

I think Morningstar analyst is worth reading
http://quicktake.morningstar.com/FundNet/MorningstarAnalysis.aspx?Country=USA&Symbol=SPHIX

Bottom line the interest rate spread between high credit bonds and junk bonds is very low by historical standards.

Thanks for the link to morningstar. Yes, the spread is very low, but the 5 year return on this investment has been >10%. The past year >10%. Over 10 years its been >5.5%. I am using this investment as the bond/cash portion of my portfolio. And the outlook on Morningstar for the remainder of this year is not negative for bonds.

 

[brewer12345]

This is a junk fund. Junk is vastly overpriced right now. I would not own a junk fund right now.

 

[Budman]

This is a junk fund. Junk is vastly overpriced right now. I would not own a junk fund right now.

But I'm uncertain whether this particular junk is significantly overvalued. How overvalued do you think junk is now? Are we likely to see a big decline soon? I am addicted and like this return.

 

[brewer12345]

But I'm uncertain whether this particular junk is significantly overvalued. How overvalued do you think junk is now? Are we likely to see a big decline soon? I am addicted and like this return.

I do junk for a living. The entire market is extremely over-valued and it is only a matter of time until the next crack up. Find something else to invest in. You'll get a chance to buy junk at a better price. The subprime mortgage market is cracking. "Alt A" mortgages are starting to follow, and this will eventually spill over into the wider junk market. Move the money to a GNMA fund or something similar, and buy junl after the bottom falls out of it.

 

[dex]

Did you do the comparision between the fund and the S&P?

 

[bosco]

I do junk for a living.

I always stuck to weed myself

 

[ziggy29]

There are enough people desperate for yield that junk bond prices are driven higher and the yields lower. I'm not going to say junk could never be a part of a portfolio, but (a) it shouldn't much more than 10% or so, and (b) only when the yield spread between junk and investment grade bonds is large enough to justify the added risk.

Now is not such a time.

 

[brewer12345]

There are enough people desperate for yield that junk bond prices are driven higher and the yields lower. I'm not going to say junk could never be a part of a portfolio, but (a) it shouldn't much more than 10% or so, and (b) only when the yield spread between junk and investment grade bonds is large enough to justify the added risk.

Now is not such a time.

A good summary. Let me give you an example of what foolishness is going on. My colleagues and I systematically looked at about two dozen junk issues that were trading at a discount to par. Almost uniformly, these were bonds issued by cheesy little companies that would obviously have liquidity or solvency problems within a year or two and were wholly dependent on continued loose crdeit standards just to stay out of bankruptcy court. Cash is a better choice, at this point.

 

[wabmester]

You'll get a chance to buy junk at a better price. The subprime mortgage market is cracking. "Alt A" mortgages are starting to follow, and this will eventually spill over into the wider junk market.

Is this what you call cracking?

 

[audreyh1]

Be aware that high-yield acts more like equity than it does other bond classes and as such it doesn't serve well as a diversifier for equities.

Just look how junk bonds acted in 2002 when the stock market was also crashing, and you'll see how both can go down big together.

Better to minimize the amount of high yield you have as the "bond/cash" portion of your portfolio. Better to have higher quality debt.

Personally, I've really wondered what would make credit spreads widen and when that might happen. Is the sub-prime market meltdown enough?

Audrey

 

[Budman]

Did you do the comparision between the fund and the S&P?

Yes and the compare shows the S&P a much higher return. But I am using this for the Bond/Cash portion of my portfolio. Here are the results:

Annual Returns (%) (As of 1/31/07)

YTD 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997

SPHIX 2.25 10.74 3.45 9.69 27.48 1.48 -4.84 -14.20 9.90 3.30 15.90

S&P 2.60 15.79 4.91 10.88 28.68 -22.10 -11.89 -9.10 21.04 28.58 33.36


Cumulative Returns (%) (As of 2/23/07)

1 Day 1 Week 1 Month YTD 1 Year 3 Years 5 Years 10 Years

Total Return % 0.02 0.35 1.41 2.25 11.00 8.29 11.40 5.68

+/- Index (S&P 500) + 0.37 + 0.65 - 0.89 - 0.35 - 3.80 - 2.11 + 3.60 - 2.12

+/- Classification Avg. + 0.03 + 0.07 - 0.17 - 0.41 + 0.24 + 0.30 + 1.74 + 0.49

% Rank in Classification 11 23 80 81 42 38 16 40


Compare Returns


About This Graph

I really wanted to show the graph, but I don't know how to do that. I still have a lot to learn about using this board.

 

[treypar]

Brewer

Do you feel the same way about the VG High Yield Fund?

 

[kat]

I put $27,500 each into Vanguard's High Yield and Short term bond funds on the same day, October 2, 2006. I have sent all dividends to my money market fund. Without reinvesting those dividends, High Yield's value is up $870 and short term bond is up $84. In the meantime, the dividend yield on HY was 2.2 higher.

Just a snapshot from recent past history.

I did it to have a little fun experiment. Most of my bond money is in a different fund.

 

[audreyh1]

Yes and the compare shows the S&P a much higher return. But I am using this for the Bond/Cash portion of my portfolio.

Budman:

The question is WHY are you using a high yield bond fund as the Bond/Cash portion of your portfolio? What is your goal with the Bond/Cash portion? Is it to balance out the equity volatility of your portfolio?

If so, look at what happened in 2000 and 2001 on your table. They both got clobbered. That's not too good for balancing purposes is it?

Do you WANT your bond/cash portion to drop like that when your equity does?

Take a look at how treasury bonds behaved over the same time period, and you'll see a huge difference.

Audrey

 

[brewer12345]

Is this what you call cracking?

Yup. You can also look at the stock chart of every/any subprime lender. Its even hitting giants like HSBC, which apparently stands for "Holy Smokes, Bad Credit!." Alt A delinquencies are heading up, but have not blown up (yet) in the spectacular manner of the subprime market.

I don't think this will ever have major effects on the true prime mortgage world, especially for lenders that made loans knowing they would be holding them. But if we get a severe housing price crash, all bets may prove to be off.

 

[brewer12345]

Brewer

Do you feel the same way about the VG High Yield Fund?

The VG fund is less junky than most junk funds. So the downside risk should be less. However, the stuff the fund holds has been bid up foolishly like everything else, so you are still buying an overvalued asset class.

 

[Budman]

Budman:

The question is WHY are you using a high yield bond fund as the Bond/Cash portion of your portfolio? What is your goal with the Bond/Cash portion? Is it to balance out the equity volatility of your portfolio?

If so, look at what happened in 2000 and 2001 on your table. They both got clobbered. That's not too good for balancing purposes is it?

Do you WANT your bond/cash portion to drop like that when your equity does?

Take a look at how treasury bonds behaved over the same time period, and you'll see a huge difference.

Audrey

I believe you are telling me that I have taken on a lot more risk with this high yield bond investment and it will not act as a stabilizer in my portfolio. Your point is well taken. I was trying to increase the yield on the bond/cash portion, but it looks like in doing so, I have taken on a lot more risk. I believe that I need to reduce this holding to something under 10% of my portfolio. It appears I have too much exposure. I appreciate your comments!

 

[dex]

Two things I think you need to research.
1. How does it trade versus stocks - look at the charts - same as or different?
2. What is the interest rate spread versus compritable length US government bonds? Is the risk justified?

Let us know what you find out.

I was suggesting looking at the chart for the s&p and the junk fund to see if the junk fund has a positive, negative or neutral correlation to stocks. I haven't looked at the chart.

Others has stated, as I believe, that the price premium between junk and US bonds does not justify the risk.

I have junk funds on my buy list --- when the price premium warrents it.

 

[CMAN]

This is a very timley thread. I was about to put a portion of my Fidelity IRA into Fidelity High Income Fund. What Fidelity Bond fund would you consider at this point as a risk stablizer. I have a portion of my bond investment in Fidelity Floating Rate High Income and Loomis Sayles Bond Istl( also corp bonds). I have been looking at Fidelity Strategic Income. I felt that this would give me enough of a spread between different bond funds. Your thoughts

 

[d]

i too would welcome thoughts on fidelity floating rate and strategic income ...

 

[Gone4Good]

The VG fund is less junky than most junk funds. So the downside risk should be less. However, the stuff the fund holds has been bid up foolishly like everything else, so you are still buying an overvalued asset class.

For sure.

All these monster LBO's you keep reading about still need to be financed. The latest, TXU, will need nearly $30B in new debt financing. One of these over leveraged pigs is going to get hung in the market and then . . . look out below!

 

[terminator]

I looked at the above Fidelity funds and ended up going with the U.S. Bond Index (FBIDX). The credit quality on Floating Rate is basically *all* BB rated and below and has a current annual yield of 6.5%. Strategic income pays 5.4% currently and has about 40% BB rated or worse. Whereas the U.S. Bond Index Fund is at 4.99% and is 67% government issuances and everything is BBB or better (about 90% is A or better).

At these rates with such a small risk premium spread between U.S. debt and junk (and AAA corporate for that matter), I considered just buying some short to mid term T-notes and/or TIPS, but I just decided that FBIDX worked for me and went with that for now. I'd echo what has already been said about junk being overpriced now. Government at 4.75%, AAA at 5.25% and junk at 6.5% is a no-brainer choice for one of the former two IMHO.