Are These Junk Bonds Worth Buying? (CIT, HCA, ZZ)

June 11th, 2012 by

(June 11th, 2012) The Federated High-Yield Svc (FHYTX) was one of the top performing high yield bond funds in the first five months of 2012, producing a gain of 7.46%. The fund is up 1.74% in the past 3 months.

We wanted to find out what this high performing fund is holding in its portfolio. Once a-quarter, bond mutual funds must disclose their holdings to the SEC. FHYTX reported its holdings on 03/31/2012. However, given the fund turns over 50% of its portfolio a year, it is possible that these bonds are still in the fund’s top holdings:

 

Company Name Coupon Rate Maturity Date June 7th Market Price
CIT Group (CIT.GCN) 7.00% 05/02/2017  $9968
Biomet Inc (Privately held) 11.625% 10/15/2017  $1076
Michael Food Inc (Privately held) 9.75% 07/15/2018   $1082

The top three holdings are in three different industries: bank holding company, orthopedic medical devices and food processing.
The bonds have an average maturity of 3.75 years and pay and average yield of 6.72% (or put another way, about 6.42% more than US Treasury Bonds with a similar maturity).

If you don’t want to buy individual bonds, should you consider investing in the Federated High-Yield Svc (FHYTX)?  The two managers responsible for trading decisions have both been with the fund since 1984 and 2011 respectively. From 2009 onwards, the fund has turned in gains of 55.52%, 16.40% and 3.48% respectively (2009-2011). In all three years, the fund outperformed its category average.  It did particularly well in 2009 and 2010 when it was in the top 16 and 14 percentile of best performing junk bond funds.

Note: FHYTX Holdings in other mutual funds have not been included.

For more information visit the Bond Funds section of Learn Bonds.

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