Investor money is flowing into junk, or high-yield, bond mutual funds.
These bonds were punished by the subprime-lending crisis this summer, but investors have since been lured back by their returns.
"We say it isn't politically correct to call them junk bonds anymore," said Andrew Feltus, manager of Pioneer High Yield Fund and Pioneer Global High Yield Fund, two of the top-performing high-yield funds.
His $4 billion Pioneer High Yield "A" (TAHYX) has a 12-month return of 13 percent and three-year annualized return of 9 percent. The $2 billion Pioneer Global High Yield (PGHYX) has a 12-month return of 9 percent and a three-year annualized return of 10 percent.
Though primarily a high-yield-bond fund, Pioneer High Yield has 14 percent of its portfolio in stocks. Both of the Pioneer funds require a 4.5 percent "load" (initial sales charge) and $1,000 minimum initial purchase.
"Since junk bonds are those rated below investment grade, the description scares a lot of people," said Mary V. Austin, portfolio manager of Pax World High Yield Fund, another top performer. "But when I look at our numbers, we're a mutual fund portfolio that is less risky than an equities portfolio."
Many investors don't take the time to understand what high-yield bond funds actually offer, she said.
Her $92 million Pax World High Yield Fund (PAXHX) has a 12-month return of 10 percent and three-year annualized return of 8 percent. This no-load fund requires a $250 minimum purchase. About a quarter of the portfolio consists of foreign bonds, with a particular emphasis on emerging-market telecommunications companies.
"I absolutely use high-yield bond funds and have dumped intermediate-term bond funds over the past month and a half to move into them," said Angela M. Thomson, certified financial planner and principal with Coastal Financial Planning Inc. in Lincoln, R.I. "There's not a lot of downside risk because money managers burned in the dot-com era learned their lesson, and portfolios aren't as risky as 10 years ago."
High-yield bonds should make up only about 5 percent to 10 percent of an individual's overall portfolio because they don't provide a lot of growth, Thomson said.
"With a high-yield bond you're basically protecting yourself with yield," she said.
Two of her favorite high-yield funds for clients are Fidelity Advisor High Income Advantage fund and Julius Baer Global High Income Fund.
The $3.4 billion Fidelity Advisor High Income Advantage (FAHDX) has a 12-month return of 13 percent and a three-year annualized return of 12 percent. It requires a 4 percent load and $2,500 minimum investment. Seventeen percent of its portfolio is in stocks.
The underlying fundamentals of high-yield bonds are still strong and so are the U.S. and global economies, Feltus said. Nonetheless, he is avoiding any of the bonds issued in the housing or consumer discretionary sectors because he considers their prospects to be troubling.
Andrew Leckey writes for Tribune Media Services.