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An opportunity has opened to get some of the smartest high-yield-bond fund managers in the country working on your portfolio.

The PH&N High Yield Bond Fund reopens for new investors on Thursday after being capped for new clients back in April, 2016, because of concerns about a lack of good investment opportunities. The fund won’t likely be open to new investors for long, and therein lies a dilemma: PH&N High Yield Bond is one of the best names in its category, but now seems a less than ideal time to start shovelling money into high-yield bonds.

If you grab a Globeinvestor.com fund summary page on PH&N High Yield Bond, you’ll find its D-series version (for DIY investors) has ranked in the first quartile of funds in its category over the three-, five- and 10-year periods to May 31. The annualized 10-year return was 6.95 per cent, compared with 6.01 per cent for the category average. In 2018, the average fund lost 2.6 per cent while the PH&N High Yield Bond made 0.8 per cent.

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The management-expense ratio for the D-series version of the fund is 0.87 per cent, higher than an exchange-traded fund for sure, but reasonable for a mutual fund focusing on a somewhat obscure asset. High-yield bonds are issued by companies with financials that aren’t solid enough to qualify as investment grade. As a result, these bonds offer much higher rates than blue-chip corporate or government bonds – and more risk of default.

The reason for caution about buying any sort of high-yield fund right now is the potential for weaker economic growth and possibly even recession. You can see financial markets anticipating a downturn in the way the yield curve on government bonds has gone flat or even inverted lately. In a world where economic growth is expected, long-term bonds have higher yields than short-term bonds.

High-yield bonds are not at their best when the economy slows. The companies that issue these bonds are financially fragile and need strong growth to generate revenues for paying bondholders. In a slowdown, these bonds might, at worst, default. Even if there’s no default, expect to see a lot of selling in the high-yield-bond sector. The price of these bonds might fall, and so would the price of funds such as PH&N High Yield Bond.

If you’re managing this fund, a pullback in high yield is great news because you can put the new money coming in to good use scooping up bargains. But investors buying in now must be prepared to see losses before they see gains.

Aggressive investors prepared to wait three to five years for results may want to take a look at getting into PH&N High Yield Bond right now. Everyone else should stick with boring, low-return bonds from governments and blue-chip companies. Lower yield comes with less drama.

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