Damage ‘Done’
Federated High Yield Trust returned an annualized 5.6 percent over the past five years as of Jan. 29, ranking first among 106 U.S. junk-bond funds with at least $250 million, according to data compiled by Bloomberg. Neavin and co-manager Mark Durbiano are part of a group that oversees $11.5 billion, including the $4.1 billion Federated Institutional High Yield Bond Fund.
The managers look for issuers with stable and predictable cash flow. High Yield Trust typically has less exposure to commodities, including energy, than its benchmark, the Barclays High Yield 2% Issuer-Capped Index, Neavin said. Adding leverage to a company in a volatile business is dangerous, he said, explaining the decision.
While he expects more bankruptcies among commodity companies, Neavin doesn’t think those failures will have much impact on the broad high-yield market. His reasoning: Prices on those bonds have already slumped enough to reflect the coming bad news.
“The damage has been done,” he said. “The pain has been felt.”
Outside of commodities, Neavin sees mostly good news. If the U.S. grows 2 percent to 2.5 percent this year, in line with consensus forecasts, that should be enough for companies to service their obligations, he said.
Echoing 2011
The rampant pessimism reminds Neavin of 2011, when investors, frightened by the prospect that Europe’s government debt problems would spill into the U.S., sent the Merrill Lynch high-yield index to a loss of 6.3 percent in the third quarter. As concern ebbed, the gauge rallied 19 percent in the next 12 months.
Today’s gloom is most overdone in the pipeline field, said Neavin, where the bonds of oil and natural gas transporters are caught up in the energy selloff even though they have limited exposure to commodity prices. One of his pipeline holdings, a bond from Crestwood Midstream Partners maturing in 2023, is down about 12 percent in 2016.
Neavin doesn’t know when the turnaround for high-yield bonds will happen, but, barring a recession, he is confident that it’s coming.