The high-yield market "appears headed for a long bounce along the bottom," according to Marty Fridson, chief high-yield strategist at Merrill Lynch. However, at least one junk manager, Brendan White of Fort Washington Investment Advisors, thinks the time is right to increase high-yield allocation.
Last week represented the 10th consecutive week of outflows from high-yield mutual funds according to AMG Data Services. More troubling to Fridson was that last week's outflows were greater than the previous week, just when the total appeared to be diminishing. High-yield returns for the first half of the year, if projected out a full year, are the worst since 1977, which Fridson says was the effective beginning of high-yield as an asset class. While Fridson believes that years of $100 billion in high-yield issuance will return eventually, it could be a few years away. "It's hard to imagine we'll see a pre-'77 environment where all companies that would have a high-yield rating are forced to resort to bank loans or the private placement market to get funding," he says. Still, Fridson would not completely rule out such a possibility.
But, Brendan White says his firm increased its high-yield allocation in its core plus fund from 10 to 15% last quarter. "As long as we can avoid a double dip recession, we think good returns can be realized.... We think the Fed can maneuver through the current environment." Fort Washington is expecting returns of 8-10% for high-yield over the next 12 months.