A Juiced-Up Junk Bond Fund

Kiplinger

For all the hand-wringing over the bond market's 2013 performance, it has hardly been catastrophic. The most closely watched bond benchmark is down 2% so far this year, but some segments have delivered decent results. Take junk bonds. Through October 4, the Merrill Lynch High Yield Master II index returned 4.2%, and the average junk bond mutual fund gained 4.1%. Junk bonds held up reasonably well this year because their high yields insulate them somewhat from the perils of rising interest rates.

One of the top-performing junk funds over the past year, Northeast Investors Trust (symbol NTHEX), is one of the oldest (it opened in 1950) and one of the most aggressive. The fund can invest up to 20% of its assets in stocks, and it can employ leverage--that is, use borrowed money to attempt to boost returns. The fund went to a 20% leveraged position last June after big selloffs in the stock and bond markets, says co-manager Bruce Monrad. As of early October, he says, the fund is no longer leveraged, though it does have 12% of its assets in stocks.

Monrad runs Northeast with his father, Edward, who has been with the fund since 1960. The pair, who call themselves value investors in the junk bond space, look for companies with solid cash flow. They also prefer bonds with relatively short maturities--three to seven years--which softens volatility. "High yield may be more stable than you think," says the younger Monrad.

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