High Yield, Up or Down An Access Fund for Either View
They lost 26.6%1 in 2008, but are high yield bonds out of the woods? We talk the high yield bond market with senior portfolio manager Jeff Ploshnick, who manages Access High Yield Funds.
Q: What's been happening in the high yield markets?
A: Like many other investment sectors, high yield bonds have seen tremendous volatility in the last six months. There was a huge meltdown this fall—investors sold heavily, prices crashed, and yields skyrocketed. Then came a big rally in late December, sending prices up and yields down.
The forces behind these gyrations were exaggerated by the lack of liquidity in the high yield market. Many former giants in the high yield bond market—Bear Stearns, Lehman, Wachovia, Merrill—are gone or have merged into other firms. With fewer market participants, there's less liquidity. That increases price volatility in the high yield market, which can adversely affect investors, particularly active investors.
Q: How does less liquidity make things tougher on high yield investors?
A: Less liquidity means wider bid-ask spreads, which are the difference between the highest price buyers are willing to pay for a bond and the lowest prices sellers are willing to accept. The wider the bid-ask spread, the harder it is for investors to get in and out of bonds. That's not good for investors who want the flexibility to adjust their exposure based on their changing views.
Q: What else could make things difficult for high yield bond investors in 2009?
A: Declines in Treasury prices, which drive Treasury yields up, would be bad for high yield bonds simply because investors could get a relatively decent yield from a safer investment. Any rise in inflation could hurt, too, by making the yield of existing bonds less attractive, all things equal, and potentially driving down the price of those bonds.
The specter of more corporate defaults could also weigh down the high yield market. Standard & Poor's thinks the default rate for corporate high yield issuers could more than double, to 10% by September. The historical average is about 4%. High yield bonds are supposed to compensate investors for that greater risk, and indeed, average yields for these bonds were 15% over Treasurys in February (the historical average is about 5%). The big question for high yield investors is, given an expected rise in default rates, are junk bond yields worth that higher risk of default?
Q: What would drive up the high yield market?
A: Anything that helps convince investors that an economic turnaround is on its way could potentially help the high yield market. In the near term, government support of any industry that's a big issuer of high yield bonds, such as the U.S. automotive industry, could help, at least temporarily.
Q: How can investors participate?
A: Investors can either purchase funds that invest in high yield bonds or purchase them directly. However, direct participation isn't easy for most individual investors.
Every high yield bond has different characteristics—issuer, term, covenants, and so forth—which you have to research and evaluate. In the closed, less-than-transparent world of bonds, that's not easy. And because they're denominated in amounts of $1,000 or more, it takes a large dollar exposure to diversify one's holdings. That's especially important now, given higher anticipated default rates.
Q: How do Access Funds make it easier to invest in the high yield market?
A: First, they offer flexibility. You can move in and out of these funds and between Access Funds and the ProFunds family of 64 index-based mutual funds, without penalties or exchange fees. Ideally, you want flexibility to change your investment if you change your market view. Most high yield bond funds make it hard to shift gears; Access Funds make it simple.
Second, Access Funds allow you to go long or short as easily as buying a mutual fund. This not only significantly increases the investment latitude for most individuals, but it also allows investors to implement strategies that many high yield investors want to pursue in difficult times like these.
Finally, Access Funds are managed to provide investment results that correspond generally to the high yield market (or, in the case of Access Flex Bear High Yield, that correspond generally to the inverse of that market), consistent with maintaining reasonable liquidity. To accomplish this, we invest in securities and other financial instruments that, in combination, should have economic characteristics similar to the high yield debt market and high yield debt securities.
The Access Flex High Yield Funds Access Flex High Yield and Access Flex Bear High Yield Funds provide exposure to the high yield bond market without the exchange restrictions and redemption fees generally imposed by other high yield mutual funds.
• Access Flex High Yield Fund (FYAIX) seeks investment results corresponding to the total return of the high yield market, consistent with maintaining reasonable liquidity.
• Access Flex Bear High Yield Fund (AFBIX) seeks investment results corresponding to the inverse (opposite) of the total return of the high yield market, consistent with maintaining reasonable liquidity.
Considering Important Risks Investing in Access Flex Funds involves inverse correlation, high yield, credit default swap, interest rate, credit, liquidity, aggressive investment technique, counterparty, foreign investment, issuer, management, market, non-diversification, repurchase agreement, short sale, and valuation risk. These risks can increase volatility and decrease performance. Please see the prospectus for a complete description of these risks.
1JP Morgan Domestic High Yield Index, 12/31/07 to 12/31/08. Source: Bloomberg.
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Many ProFunds routinely employ leveraged investment techniques that magnify gains and losses, and result in greater volatility in value. Each geared (leveraged or inverse) ProFund seeks a return that is a multiple (e.g., 2x, -2x) of the return of an index or other benchmark (target) for a single day. Due to the compounding of daily returns, geared ProFunds' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period. These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their ProFunds holdings consistent with their strategies, as frequently as daily. For more on risks, please read the prospectus.
ProFunds are not suitable for all investors because of the sophisticated techniques the funds employ. Investing involves risk, including the possible loss of principal. ProFunds entail certain risks, including risk associated with the use of derivatives (swap agreements, futures contracts and similar instruments), imperfect benchmark correlation, leverage and market price variance, all of which can increase volatility and decrease performance. For more on correlation, leverage and other risks, please read the prospectus. There is no guarantee any ProFund will achieve its investment objective.
All ProFunds are subject to active investor risk. There are no restrictions on the size and frequency of trades and no transaction fees. The frequent exchanges our policies permit can decrease performance, increase expenses and cause investors to incur tax consequences.
Carefully consider the investment objectives, risks, charges and expenses of ProFunds before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing.
ProFunds are distributed by ProFunds Distributors, Inc.
