5 high-yield Fidelity funds

by Jack Bowers, editor Fidelity Monitor

Here we look at four Fidelity high-yield bond funds, listed in increasing risk order: Floating Rate High Income (FFRHX) Strategic Income (FSICX), Focused High Income (FHIFX), High Income (SPHIX) and Capital & Income (FAGIX).

Fidelity Floating Rate High Income is the least-risky high-yield fund in Fidelity’s lineup, sporting an overall risk level of about 0.3.  There’s very little interest-rate risk here, but plenty of credit risk. Still, for income-hungry investors, it offers a yield of 3.5%.

Fidelity Strategic Income allocates its assets to four segments of the bond arena, with a neutral mix of 40% high-yield, 30% U.S. Government / investment-grade, 15% emerging market, and 15% foreign developed market.  

Overall, the combination offers a good yield (4.0%) and solid capital gain opportunities, although it’s about twice as risky as an investment-grade fund (0.35 volatility).

Fidelity Focused High Income invests mainly in BB-rated corporates, which are considered the top rung of the high-yield universe.  The fund earns a robust 4.8% yield while running with a 0.4 volatility score.

Over the last 12 months, prices for high-yield bonds have come under pressure due to spillover effects from the mess in Europe.

But most of the holdings in this fund’s portfolio are domestic issuers, some of which could be upgraded to investment-grade status in the coming year. As such, we see solid capital gain potential.

Fideity High Income is Fidelity’s mainstream high-yield bond fund. It invests across the low-grade spectrum, but concentrates mainly on B-rated issues. It boasts a yield of 6.1%, but it also carries a 0.6 risk score.

Normally Fidelity finds a lot of capital gain opportunities in a fund like this, but over the last year it’s been a tough environment because of concerns about the strength of the global economy.

But yield spreads in the high-yield arena remain healthy, and default rates remain low, so there’s still a lot of good opportunity waiting in the wings.

Fidelity Capital & Income is Fidelity’s most aggressive high-yield bond fund, which runs with a risk score of about 0.75 (it tends to behave more like a conservative stock fund than a bond fund, thanks to its emphasis on the lowest rungs of the credit spectrum and a small weighing in leveraged stocks).

Fidelity has some of the best high-yield analysts in the industry, which is why this fund has generated stock-like annual returns (10.3%) over its 35-year history.

The fund was hurt by losses in its stock holdings last year, and in recent weeks it has been affected by concerns about Greece’s possible exit from the euro, as well as some apparent liquidity problems in the high yield market stemming from JP Morgan’s unwinding of its credit market bets.

But high-yield spreads are at healthy levels, and bond values have been dragged down for reasons that have little to do with fundamentals, so it should be no surprise to see a high-yield rebound if credit fears begin to dissipate later in the year.    

Learn more about this financial newsletter at Jack Bowers' Fidelity Monitor.

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