Q–I’ve been advised to invest in Kemper High-Yield Fund. What’s your opinion?
A–Junk doesn’t always mean bad, so long as you’re aware of the inherent risk.
The $4 billion Kemper High-Yield Fund, up 13.49 percent last year to rank in the middle of the high-yield bond group, is a respected fund that has benefited from a steadily growing economy. Its three-year annualized return of 9.4 percent places it in the upper quartile of its peers.
Average credit quality of its bonds is B. A recent breakdown of the portfolio included 73 percent B, 18 percent BB, 8 percent below B and 1 percent AAA. The average bond maturity was 7.7 years. The top holdings are bonds of Owens-Illinois, PanAmSat Capital, AMF Group, Riverwood International and OrNda HealthCorp.
“Funds such as this offer more income than just about anything else, although there is significant risk involved,” explained Todd Porter, fixed-income analyst with the Morningstar Mutual Funds investment advisory, who recommends them only for a portion of an individual’s portfolio. “The economic risk is that a recession occurs in the economy, in which case these funds could lose 15 percent easily.”
This Chicago-based fund requires a $1,000 minimum initial investment.
Q–I’m curious about the new inflation-indexed Treasury bonds and wonder whether they’re a good investment. What do you think?
A–They have their uses. The inflation-adjusted notes should provide handy diversification for investors with a lot of their holdings in stocks. They’ll perform best in periods of high inflation and shouldn’t be as sensitive to interest rate changes as regular bonds. Since they’re taxable, they should be especially popular in retirement accounts.
The down side is that they’re relatively complicated and modest in yield.
Unlike regular Treasury issues, these new investments guarantee a return that will beat inflation if held to maturity. If there is deflation, at maturity you’ll get back the greater of the inflation-adjusted principal or the par amount of the original issue. The first offering last Wednesday was of 10-year maturities in minimum denominations of $1,000 with a yield of 3.449 percent.
“The biggest risk you have in owning a Treasury security over a long time period is that your income is eroded by inflation, so, because these bonds take away that risk, I think they’ll be good for many investors,” said Martin Mauro, senior economist and fixed-income strategist for Merrill Lynch.
Linked as the bonds are to the consumer price index, it’s unsettling that the government has lately talked of adjusting the way that index is computed. Nonetheless, any changes made to the CPI aren’t expected to be dramatic.
The interest rate, set at auction, remains fixed for the life of the security. These bonds won’t generate as much current income as regular bonds. Semiannual interest payments will be made, based on the inflation-adjusted principal at the time the interest is paid, in mid-July and mid-January.
Investors can buy directly from the government through the Treasury Direct system or through brokers and some mutual funds. It might make sense to wait to find out how resale markets for the notes develop before investing.
Q–I hold shares of Microsoft Corp., and as a result of its continued remarkable success, I’m interested in other software companies. Which have the best prospects?
A–Bill Gates doesn’t yet have all software industry profits to himself. Oracle Corp. is the most recommended software stock among Wall Street analysts, garnering 16 “strong buy” and eight “buy” recommendations, according to the I/B/E/S International research firm.
Microsoft is second with 12 strong buys and 10 buys, followed by BMC Software with eight strong buys and seven buys. Informix Corp. receives 10 strong buys and four buys, while Netscape Communications merits nine strong buys and two buys. Other favorites are Peoplesoft Inc., Computer Associates International, Broderbund Software and Medic Computer Systems.
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Andrew Leckey, whose new book “The Morningstar Approach to Investing: Wiring into the Mutual Fund Revolution” (Warner Books) is now available in bookstores, answers questions only through the column. Address inquiries to Andrew Leckey, “Successful Investing,” Suite 367, 76 N. Maple Ave., Ridgewood, N.J. 07450.
