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Actively managed high yield bond funds may offer sustainable income, says white paper

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In the quest for sustainable income sources that keep pace with inflation, investors may feel pressured when relying only on investment grade bonds.

But according to a white paper recently issued by RidgeWorth Investments, for investors who can withstand short-term portfolio volatility, high yield bonds may offer three distinct benefits.
 
RidgeWorth's publication, "In Search of Yield: The Case for Actively Managed High Yield Bond Funds," suggests investors may benefit from an actively managed portfolio of high yield bonds.
 
The paper explains the attractive characteristics of these securities, highlighting the key differences between investing through actively managed mutual funds and passive exchange-traded funds (ETFs), a commonly used vehicle to invest in high yield bonds.
 
"An actively managed fund can benefit from a highly experienced manager's ability to deftly navigate shifting market conditions in an effort to increase potential return," says George Goudelias, managing director at Seix Investment Advisors, a boutique investment firm owned by RidgeWorth. "ETFs, on the other hand, are often designed to track the performance of an index. As such, little or no attention is given to managing credit risk or striving to take advantage of pricing inefficiencies.”
 
According to the paper, high yield bonds typically pay a higher coupon than Treasuries and high grade corporate bonds, offering a more attractive level of income.
 
"High yield bonds may be more vulnerable to credit risk, but we believe some exposure to high yield investments may be beneficial to investors, particularly during this low yield environment – if you are investing with an experienced management team," says Ashi Parikh, chief executive and chief investment officer of RidgeWorth Investments.
 
High yield bonds tend to have less sensitivity to price declines than their higher quality counterparts during periods of rising interest rates, providing the potential for added security in a changing rate environment.
 
"Of course, by definition, these bonds are riskier than their fixed income counterparts. Professional managers are continually evaluating the market and making portfolio adjustments to help investors minimise that downside risk,” says Parikh.
 
High yield bonds share characteristics of both equities and bonds. Their prices tend to mimic the equity market yet they still offer the income potential of other fixed income investments and investors may also profit from attractive risk-adjusted returns during favourable equity market conditions. When combined with other income asset classes in a diversified portfolio, an allocation to high yield bonds may temper principal fluctuation and potentially enhance returns over the long term.
 
The paper concludes that against the current interest rate backdrop, high yield bonds may offer advantages to investors who have been unsatisfied with returns from traditional fixed income securities. In particular, actively managed high yield bond mutual funds may offer yield potential for individual investors, especially those nearing retirement.  

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