In March, the market priced in somewhere north of a cumulative default rate of 70% over five years for high-yield bonds, says Larsen. “I don’t think we’re going to have close to that many defaults,” he says. “We didn’t come close to that in ’08-’09.”
He emphasizes the importance of having a really good credit manager who can pick through each issue’s balance sheet, look at its business models and understand its strengths and weaknesses.
Closed-end funds don’t resonate with everyone. “Too risky for my blood,” says Thomas Meyer, CEO of Meyer Capital Group, a fee-only investment management and financial planning firm in Marlton, N.J.
He’s concerned about liquidity risk and interest cost, which he says can drive up internal fees well over 2%. “Leverage works great in an up market,” he says, “but look out below in a down market.”
Instead, “we are being very eclectic utilizing short-term bonds and bond ETFs,” says Meyer, and even using short-term CDs since they were yielding more than cash. For more aggressive investors, Meyer’s firm is adding high-quality preferred securities, convertibles and a high-yield bond fund.
But for financial advisors who don’t have as broad an investment bandwidth, closed-end funds could be the way to go—as long as they do their homework and educate clients.