High-yield bond funds invest as follows
- In fixed-interest securities
- At least 80% of their assets are Sterling denominated
- At least 50% of their assets must be rated below BBB minus
The benefits are
- High Yield (Our current recommended High-Yield Bond funds has a yield of 12.95% per annum)
- Possible capital appreciation through shrewd buying and selling decisions by the fund manager
- High-Yield bond fund investors tend to benefit from falling interest-rates
Investors should be aware of the risks carried by high-yield bonds and we recommend you take our advice before investing or if you hold such funds. From November 2007 to January 2009, high-yield bond funds typically lost around 40% of their value due to their exposure to default risk, actual defaults and down-grades in the credit ratings of many corporate bonds.
High-yield bond funds are exposed if general economic conditions worsen however medium and medium-high risk investors will still find them attractive for the following reasons
- High-yield corporate bonds are still less risky than the shares of the same company
- The high yield is a very attractive compensation for the risk. For example with a 12.95% yield, a corporate bond fund can make a 5% capital loss, pay it's annual charges of say 1.75% and still give the investor a total return of 7.20%
- Corporate bond funds can be held by stocks-and-shares ISAs, giving the full return to investors with no further income or capital gains tax to pay
- If interest rates fall further, this will have a positive impact on high-yield bond funds
- If economic conditions improve the underling bonds held by the fund are likely to be upgraded by the credit rating agencies, which will have a positive impact on the fund price
For a less-risky alternative, investors should consider regular corporate bond funds or strategic bond funds.
For more information about high-yield bond funds, Contact Us or use the Enquiry Form.