In the July-to-October 1990 bear market, the average stock fund lost 18.3%, and gained 36.8% over the next year. High-yield bond funds lost 9.1% and gained 27.7% over the next year.
Bruce Monrad, manager of Northeast Investors Trust, says that relative to Treasury bond yields, high-yield bonds look good. The problem: Junk bond yields have been falling along with interest rates. So he's investing in issues that pay higher yields but still have acceptable cash flow and asset coverage. "The absolute levels of high-yield bonds to Treasuries are worrying," he says. "People are not used to buying 6% junk bonds."
Monrad is investing in California utilities because they represent good values. He owns Pacific Gas & Electric and Edison International. He also favors energy, natural gas companies and entertainment companies that have dependable cash flows. He has a sizable stake in AMC Entertainment. The company has low debt levels and is the second-largest theater company. He also likes Pathmark Stores, which does strong business in urban areas.
Durbiano, of Federated, says we will have continued modest economic growth and corporate earnings. He expects default rates will continue to decline. But the big risks are the impact of slow earnings on equity market valuations, falling consumer confidence and geopolitical uncertainty.
He favors the consumer and health care sectors. Holdings include Health Care Corp. of America and Premier Parks. Demand and cash flow are stable, unlike more cyclical companies.
One area where he's finding values is in the lodging sector. The hotel business still is feeling the effects of 9/11. But he favors Starwood, Host Marriott and Hilton because the companies have strong franchises and assets. He is underweighted in utilities, technology and telecommunications. However, he likes Qwest and U.S. West because the bonds have been beaten down.
"The real question is not if the U.S. economy and high-yield bonds will recover," he says, "but it is when they will recover."