High Yield Bond Program
High Yield Corporate Bonds are often referred to as junk bonds. This label is due to the lower credit quality of these bonds and the higher yield that these bonds offer. While the default rate on bonds found in this category does exist, a mutual fund portfolio offers a wide diversification of issuers to lessen the impact of defaults. The difference in yield on these bonds when compared to investment grade corporate bonds or Government bonds is often enough to overcome the default rates.
The direction of interest rates, length of maturity, and credit quality drive the price of bonds. In the high yield bond market the price is also driven by the prospects of the economy. During times of recession when default rates are expected to be higher, the price of high yield bonds tends to decline at a faster rate. However, if it is perceived that a recession is ending, and that the prospects for the economy are improving high yield corporate bonds can stage impressive rallies. These price rallies are a bonus to the already higher yields that these bonds offer.
One additional attribute of these bonds which makes them more favorable to savvy investors is that their price trends tend to be much smoother than we see in the stock market. That reduces the number of "whipsaw" trend reversals that may appear.
There are hundreds of high yield bond funds available to investors. These bond funds are offered with a wide variety of restrictions and fees that often hinder investors' ability to move quickly. There is also a group of funds that are referred to as "A" share funds that are available to investors with a sales fee, but are available to Institutional Investors at the net asset value without the sales fee.
For the High Yield Bond Program, it is the goal of Global Investment Solutions to invest in mutual fund portfolios containing high yield corporate bonds when the trend for these bonds is moving up. When prices begin to decline and trend lines are broken, this program will reduce or eliminate exposure to the high yield bond funds and move to the safety of money markets. The program may also invest a portion of the portfolio into a fund that is short High Yield Bonds to benefit during declining prices or Government Bonds that tend to appreciate in value during economic adversity.
There is no guarantee that this method of investing will produce results that exceed those of buy and hold investors. Based on the combination of high yields when invested and the historical smooth trending nature of this asset class, we believe this method of investing offers a solid opportunity for the more conservative portion of assets.