Junk bonds, and the mutual funds investing in them, had a difficult 2015. But that doesn’t mean investors should ignore this high-yield area of the market now.
Instead, the market for junk bonds in 2016 requires one particular virtue — selectiveness.
Stay far away from the funds that have excessive allocations to the distressed and illiquid. Simply put, pick your junk with the tenacity of a dumpster diver.
Exemplary of junk bonds to avoid: Third Avenue Focused Credit (TFCIX), which closed to investors on Dec. 10 and was placed into liquidation by its board of trustees.
TFCIX had focused allocations of 5% or more on distressed names like Clear Channel Communications (CCO). By its closure, TFCIX had lost 30% in 2015, whereas the average high-yield bond fund shed just about 4%.
So with the lessons learned over the past year, the best junk bond funds to buy now are broadly diversified among the higher quality junk bonds.