Nobody loves you when you're down and out. In 1990, nobody loves the battered junk bond market.
The high-yield game, as this column has frequently pointed out, is always risky. Even in the best of times, only a modest speculative portion of one's investment portfolio should ever be committed to it. But, even with that caveat in mind, this year qualifies as downright scary.
Thirty-two high-yield bond issuers have defaulted, a hefty 5.8 percent annualized default rate. Bond issues of recession-prone industries such as casinos, building materials and retailers have been hardest hit. There's fear that a combination of weak economy and high oil prices by year-end could push the market to its highest default rate in two decades. Performance is sputtering. During the initial weeks of the Iraqi crisis, the index of junk bond issues suffered a negative return of 3.5 percent.
Meanwhile, once-golden Wall Street junk-bond operations -- one by one, from Merrill Lynch & Co. to First Boston Corp., from Smith Barney, Harris Upham & Co. to Bear Stearns Cos. -- have been dethroned. Drexel Burnham Lambert Inc. was just the start.
Do low prices in junk bonds provide a buying opportunity for an investor willing to take a chance? It all depends on your confidence level.
"No one can pick a market bottom, and you can be sure the high-yield bond market will remain volatile throughout the year," cautioned Mariel Clemensen, director of high-yield research for Citicorp Securities Markets Inc. in New York.
There are a few quality-credit bargains left in the wake of the recent market drop, Clemensen believes, with RJR, Viacom and Foodmaker debt issues her favorites.
"High-yield bonds are cheaper than a few weeks ago, but there's no assurance of what's next," warned Martin Fridson, managing director for high-yield research at Merrill Lynch.
The only way to play the high-yield market, in Fridson's eyes, is to build a diversified portfolio of bonds. If you aren't able to do that, look to a mutual fund to spread your risk for you.
"In the turmoil of 1987, the high-yield market wound up outperforming the Treasury market and stock market, so once again we must wait until all results are in," said Margaret Eagle, portfolio manager of Plymouth High Yield Portfolio, best-performing high-yield fund in 1990. "However, the current political uncertainty casts such a broad shadow that I would wait on buying any investment vehicle until more has been resolved."
Best performers in her fund are the bonds of companies which have found their industry niches, such as Joy Technologies and Bucyrus-Erie. The largest holdings include recession-proof debt issues of the Kroger grocery chain and Duracell.
The top high-yield bond funds in total return for 1990, according to Morningstar Inc., have hardly been barn-burners:
*Plymouth High Yield Portfolio, Fidelity Investments, Boston; $16 million in assets; 4 percent "load" (initial sales charge); $1,000 minimum initial investment; up 5.82 percent.
*Champion High Yield Fund USA, Champion Asset Management, Denver; $15 million in assets; 4.75 percent load; $1,000 minimum; up 3.69 percent.
*Merrill Lynch Corporate Bond High-Income Class A, Merrill Lynch Asset Management, New York; $728 million in assets; 4 percent load; $1,000 minimum; up 3.41 percent.