Wall Street Journal Essays
Three authors of The Wall Street Journal wrote on 11 December 2015 an article titled "Worried about Your High-Yield Bond Fund? Devise an Exit Strategy", that article is a warning to all individual and corporative investors that have important positions in Mutual Funds with previous performances over 10% in 2014 and 2015. Those mutual funds represent a risk for the current investors that have positions in those high-yield bonds. Those bonds have positions in China and other emerging markets that are slowing their growth for 2016 and affront problems in cash flow and currency depreciation (Maxey, Krouse, and Zweig).
The first mutual fund Blackrock High Yield Bond Fund has almost 80% of its assets in high-yield bonds with maturities between four and ten years. The investing sectors of the mutual fund are communication, financial services, and consumer sector.
The second mutual fund Metropolitan West High Yield Bond Fund has almost 80% of its assets in high-yield bonds with maturities between two and fifteen years. The investing sectors of the mutual fund are technology, consumer sector, and energy.
The third mutual fund T. Rowe Price High Yield Fund has almost 80% of its assets in high-yield securities and bonds with maturities between two and ten years. The fund has 75% in domestic bonds and the rest in foreign bonds. The investing sectors of the mutual fund are energy, biotechnology, and consumer sector.
The article wrote by Maxey, Krouse and Zweig has a strong relation with the seventh chapter of the book: Risk and Return. The calculations of the return depend on the yield or difference between the investment money at he beginning and the maturity of the security. The bonds are are called high-yield because they had a previous performance better than the average of mutual funds in the market, but it is necessary to consider that a high-yield performance comes with a high risk. The risk represents the possibility to get a result that is not favorable to the investor forecasts.
The expected return of a unitary asset of that high-yield mutual fund for 2016 will be negative due to the reduction in expected cash flows of the primary assets where the mutual funds invest. Using the Theory of Capital Asset Pricing Model (Investopedia), it is possible to demonstrate the reduction of asset value:
CAPM(%): Expected return, rf: risk-free rate, b: beta security, rm: expected a market return.
CAPM(%) = rf + b*(rm-rf)
A decrease in the value of rf provokes a direct decrease in the CAPM value. The expected market return will lower than the market return of the previous year. The value of "rm" depends on of the index or market where the asset is negotiated.
The best strategy for investors in these years is to plan an exit strategy for these assets increasing their position in other hard assets as gold, silver; US dollar and Real State. This year is not the best moment to enter the market of high-yield bonds.
The article enhances the my learning of chapter 7, the relation between risk and return are directly proportional, that is, an increase in risk represents an increase in the potential returns of the considered asset. The market environment and the proper conditions of the asset are the factors that affect the risk and return of the asset. For the example of the high-yield bonds, the bonds invest in several assets with a high growth rate located in emerging economies of South East Asia and Latin America.
Works Cited
Investopedia. Capital Assets Pricing Model. 2015. Web. 14 April 2016.
MAXEY, DAISY, SARAH KROUSE y JASON ZWEIG. The Wall Street Journal - Worried About Your High-Yield Bond Fund? Devise an Exit Strategy. 11 December 2015. Web. 14 April 2016.
