Success stories among actively managed funds are harder and harder to come by, as the recent article by IndexUniverse’s Cinthia Murphy made clear. But as everyone knows, this doesn’t mean active managers can’t outperform the market.
A case in point is the AdvisorShares Peritus High Yield Fund (HYLD).
Launched in November 2010, the fund is a rare active ETF success story. HYLD has been the second-best-performing fixed-income ETF this year, behind the SPDR Barclays Convertible Securities ETF (CWB).
And so far, this year has proved quite challenging for bond investors.
The only fixed-income funds delivering returns greater than 1 percent for the year thus far are all high-yield products, with HYLD’s performance making a strong case that it pays to be selective with credit choices.
Indeed, HYLD bears little resemblance to the broad high-yield market. Its approach has been rather straightforward:High yield is all about the credit risk. Thus, the manager has reduced exposure to interest rates, while targeting credits that are expected to continue to deliver a high level of current income.
A comparison of the fund’s portfolio to the Barclays High Yield Index as of June 28, while slightly dated, highlights both strategies.
HYLD has an effective duration of 3.8 compared with an effective duration of 4.4 for the Barclays High Yield Index. This means that for every 1 percent parallel rise in interest rates, the portfolio is expected to fall by roughly 3.8 percent compared with 4.4 percent for the index.
With only 70 bonds in the portfolio compared with roughly 2,000 bonds in the Barclays High Yield Index, however, it’s clear HYLD’s managers have been very selective and haven’t shied away from bonds with higher credit risk.
Compared with the broad market, the fund has substantially more weight allocated to bonds rated below CCC+. Not surprisingly, the portfolio’s option-adjusted spread—the market’s measure of credit risk—is more than 200 basis points higher than that of the index.
Putting that all together brings HYLD’s recent outperformance into focus. Moreover, at a time when yield is hard to come by, HYLD delivers a yield-to-maturity of 9.6 percent versus 6.8 percent for the Barclays High Yield Index.
At first blush, it seems HYLD’s high price tag of 1.35 percent, or $135 for each $10,000 invested, might be worth it.
But before rushing in to make HYLD your core bond holding, there are a few things to keep in mind:
1. Active manager success can be fleeting and rather unpredictable.
Prior to 2013, over rolling one-year holding periods, HYLD beat out the Barclays High Yield Index just seven times out of 269, or just 3 percent of the time. In 2013, the story is much different, with HYLD outperforming more than half the time.
Admittedly, this performance comparison is a bit unfair since there aren’t any funds that track the entire high-yield bond space. The over-the-counter trading of bonds forces even marketlike index funds to make compromises.
High-yield bond ETF stalwarts like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) track constrained versions of broad high-yield indexes that screen for liquidity.
However, comparing HYLD’s performance to HYG and JNK shows a similar trend of underperformance prior to 2013 and an outperformance year-to-date.
In fact, this year’s outperformance has been startling:HYLD beat HYG and JNK over rolling one-year holding periods 97.5 percent of the time.
2. High-yield bonds are called junk bonds for a reason:They’re speculative.
While corporations have benefited from the lower interest rates and are as flush as ever with cash, their need to roll short-term high-yield debt in a rising-rate environment can change repayment prospects in a hurry.
While avoiding interest-rate risk and focusing on credit remain in favor, HYLD’s forays into the junkier parts of high yield will likely benefit investors.
However, fund holders must have faith in the fund manager’s ability to time the potential head winds that high-yield bonds may face from the uncertainty surrounding continued corporate profitability and the unwinding of the Fed’s quantitative easing operations.
Will HYLD continue to shine bright or fizzle out like so many other active strategies?
The fund’s recent run suggests that an active approach may be the way to navigate the turbulent times to come. However, the skeptic in me finds it hard to believe that the fund will continue to live up to its high price tag.
At the time this article was written, the author held no positions in the securities mentioned. Contact Gene Koyfman at email@example.com .
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