What are we looking for?
In the search for income, some investors have turned to bonds with riskier, below-investment-grade credit ratings. But high-yield bond funds are now staring rising interest rates and increased volatility in the eye. Which funds were best able to weather the changes of the last year?
We looked for the 15 high-yield fixed-income funds with the top returns for the year ended June 30. U.S. dollar, segregated, pooled and duplicate versions of the funds were excluded.
What did we find?
Only one-quarter of a fund's holdings need to be in high yield bonds for the fund to gain entry to this category, but our top performer calls itself a "pure high yield play."
The Manulife High Yield Bond Fund saw gains of 10.9 per cent in the period. While the fund is coming up on its second birthday in Canada, the strategy has been run in-house at Manulife for decades, and a U.S. version of the fund recently won a Lipper award in its fourth year running.
The fund tries to limit unpredictability. "We found in the high yield market place, even though it's less volatile than equity, it does tend to sway," said Konstantin Kizunov, who manages the fund on a daily basis.
To lessen the impact of that movement, the Manulife fund tries to invest outside of the more liquid positions that attract exchange-traded funds. The idea is to protect against some of the rise and fall in bond prices driven by ETF flows, according to Terry Carr, head of Canadian fixed income at Manulife Asset Management Ltd.
"What the fund has done really well is find great securities outside those ETF standard bearers of big liquid issues to invest our clients' money in and lower our volatility," Mr. Carr said.
As an example of debt that fits this profile, Mr. Kizunov points to the performance of a stable Canadian company, DirectCash Payments Inc., which is a major provider of ATMs, debit terminals and prepaid phone and cash cards in the country.
He also likes the coupon on copper producer and diversified miner Thompson Creek Metals Company Inc., which raised debt to pay for an upcoming project.