Investing in Better Quality Junk

This high-yield bond fund pays well while keeping risk down.

At a time when investors hunger for yield, junk bonds look appealing. But if the economy tanks, more high-yield bonds could be downgraded and more issuers could default. If so, declines in the value of the bonds will more than offset those generous yields. In fact, the average junk bond fund has lost money in 2011.

But junk-bond funds are not all alike. Some are way more selective than others and seek to cut risk without sacrificing much, if any, income. One fund that fits that description is CNI Charter High Yield Bond. CNI focuses on senior secured bonds, which have high priority for repayment and are backed by collateral. The fund keeps maturities short—four to seven years, mostly—which dampens volatility in bond prices. Over the past ten years, the fund returned 7.6% annualized, compared with 8.5% for the Bank of America/Merrill Lynch High Yield Total Return Index.

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Jennifer Schonberger
Staff Writer, Kiplinger's Personal Finance