Is now a good time to invest in junk bonds? If so, who has the best junk? Will we find it in corporations, municipalities or overseas?
The short answer is that, if you own the right mutual funds — and if you are patient and don’t mind taking some additional risk — any time can be a good time buy junk bonds. That said, if you buy the wrong fund at the wrong time, your junk bonds might be … well, junk.
In different words, not all junk is created equal. So let’s separate the trash from the treasure!
If you’ve ever seriously studied the world of fixed income, you know that bonds can be much more complex, and therefore more challenging, than that of equities. And, if you are like me, you humbly stepped away from trying to pick the best bonds and spent your time trying to pick the best bond managers instead. The wise investor always learns when to outsource the security selection over to someone else!
Therefore, when it comes to buying junk, you need to hire someone (or a team) that can sift through the piles of junk-bond trash to pull out the junk-bond treasures. With this in mind, I present you with the following three mutual funds:
Best Mutual Funds for Junk Bonds – Loomis Sayles High Income Opportunities (LSIOX)
LSIOX 30-Day SEC Yield: 4.8%
Dan Fuss knows junk. Without a doubt, he and his management team at Loomis Sayles are the best at navigating the complexities of the fixed income world, and his Loomis Sayles High Income Opportunities (LSIOX) is a standout.
LSIOX consistently outperforms 90% or more of the roughly 750 funds in the high-yield category, and returns are stock-like without quite as much market risk. The 10-year return of 9.5% outpaces 92% of all other junk bond funds, as well as the S&P 500 Index!
However, keep in mind that stock-like gains can bring stock-like declines.
For example, in 2008 LSIOX had a return of -28.5%, but in 2009 it jumped back 60.3%. Therefore, junk bonds can get hit hard in economic recessions but can be a good addition to an aggressive investor’s portfolio.
The basic A shares of this fund — NEFHX — charge 1.15% in expenses, plus a 4.5% maximum load, which is fairly expensive, but it’s still around the high-yield category average of 1.13%, and Fuss and his team have the track record to justify the cost. Minimum investment for NEFHX is $2,500.
Best Mutual Funds for Junk Bonds – Franklin High Income A (FHAIX)
FHAIX 30-Day SEC Yield: 4%
If you want another example of a well-managed, no-holds-barred junk bond fund, Franklin High Income (FHAIX) is it. This Franklin Templeton Investments fund has been open to investors since 1969 and has had the same management team in place for 16 years, making FHAIX the wise, old sage of junk bond funds.
Like many high-yield bond funds, FHAIX produces high returns and the volatility associated with aggressive investing. The 10-year annualized return of 8.3% places it ahead of 82% of its high-yield category peers and performance ranks for shorter periods are consistently better than the middle of the junk bond pack.
To save some money, a load-waived option of this fund is available with Franklin High Income A Load Waived (FHAIX.LW). Otherwise, FHAIX has a 4.25% maximum load charge, as well as 0.76% — or $7.60 for every $1,000 invested — in annual expenses. Minimum investment is $1,000.
Again, buyer beware with this fund and other high-yield bond funds. Declines can be steep in economic crises but long-term returns are quite rewarding.
Best Mutual Funds for Junk Bonds – Fidelity New Markets Income (FNMIX)
FNMIX 30-Day SEC Yield: 4.77%
The best junk bonds are often found outside of the U.S., and Fidelity New Markets Income (FNMIX) does this well. With two-thirds of the mutual fund’s holdings in foreign bonds, and the vast majority of those below investment-grade (BBB) rating, FNMIX provides a wealth of junk from all around the world.
As with our other featured junk bond funds, this one has had the same manager for a long period of time. John Carlson, at the helm for more than 19 years, can boast about his portfolio’s 10-year annualized return of 10.2%, which places it ahead of 89% of its emerging markets bond category peers.
At 0.86%, the expense ratio for Fidelity New Markets Income is well below average, and the fund doesn’t have a load charge to speak of, either. Minimum investment is $2,500.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.