Every investor eventually learns that No. 1 rated funds have their shortcomings. Their place at the top, like someone's 15 minutes of fame, is short-lived. Ultimately, what matters most to shareholders is how consistently the fund has served them, where it invests its assets and how respectable its total return has been.
But how do you evaluate a fund whose name implies it's a winner? You simply look closely at what it does. And we can tell you the champion we're looking at this month is a warrior.
The Champion Income Fund is a high-yield bond fund that's been around since 1987. It's a fund for folks who want a high level of current income and are willing to invest in low-rated, high-yield bonds to get it. This fund's investment strategy has paid off handsomely for long-term investors: Since the fund's inception, it's had an average annual return of about 12 percent. For the ratings-conscious, Champion has been ranked No. 2 out of 53 high-yield bond funds for the past 10 years, according to Lipper Analytical Services.
Over the past year, the fund hasn't lived up to its long-term history. Up just 1.93 percent for the year ending November 30, 1998, Champion still ranked in the top half of all similar funds, 103rd out of 233. The average high-yield income fund's total return during that period was down 9.69 percent.
Making money in the high-yield fixed-income market in 1998 wasn't easy. Just as equity markets got hit hard last summer, so did high-yielding securities. "One [problem] was the slowing global growth," says David P. Negri, Champion Income Fund's portfolio manager. "The second factor was credit contraction by banks. When credit isn't as available, that hurts a company's ability to expand, finance inventories, purchase other companies and so on, all of which changed people's outlooks for the balance of 1998 and into 1999."
Negri, like other money managers, isn't expecting a recession in 1999. As of December, he expected continued low inflation and slow economic growth into 1999. "A slow-growth environment may not be so good for an equity holder who's looking for earnings growth," says Negri. "But the beautiful thing about high-yield bonds is the debt obligation. The company doesn't have to show me double-digit growth. It just has to pay me the [interest] on my bonds."
At press time, there were 340 mostly domestic bond issuers in the fund's portfolio. The average maturity of the portfolio's bonds was 6.8 years; the average quality of all the bonds was double-b-minus; and the industries the fund invests most of its assets in were telecommunications, energy, gaming and hotels, and service.
"High-yielding bonds are very much a hybrid security," says Negri. Because of their performance, Negri says, "People call them everything from `equities in sheep's clothing' to `half equities and half traditional bonds.' " Remember that when perusing high-yielding fixed-income funds.
Dian Vujovich is a nationally syndicated mutual fund columnist and author of Straight Talk About Mutual Funds (McGraw-Hill), Straight Talk About Investing for Your Retirement (McGraw-Hill), and 10-Minute Guide to Stocks (Macmillan).