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Seeing all pieces of the puzzle is crucial in high-yield bonds

Even if some market participants believe high-yield bonds currently aren’t offering much value, Fidelity’s Adam Kramer is drawing a different conclusion.

“Focusing on credit spreads without considering the asset class’s current yield or income potential will give you an incomplete picture,” contends Kramer, who, alongside Ford O’Neil, co-manages Fidelity® Strategic Income Fund (FADMX).

As of September 30, high-yield bonds were yielding about 4% more than comparable U.S. Treasuries, closer to an all-time tight level than to the typical spread you might see in a recession, explains Kramer.

He points out that credit spreads on corporate high-yield debt have meaningfully tightened, while bond prices have risen accordingly, since the regional banking industry debacle in March.

In managing the fund, Kramer and O’Neil allocate assets across several-income paying categories. Based on Fidelity’s research, they’ve established a baseline allocation of high-yield bonds, U.S. government and investment-grade bonds, emerging-market debt, and non-U.S. developed-market debt.

The co-managers then explicitly over- and underweight each of these asset classes depending on where they see the most opportunity.

Kramer believes that, given the relatively attractive current yields being offered, investors in high-yield bonds could fare well even if the U.S. economy experienced a recession and there was significant credit-spread widening, something he could not say for equities or the other segments of the fund’s investment universe.

“Although high-yield bonds have surely experienced years in which they’ve lost value, the big difference this time around,” says Kramer, “is that yields have risen so much, especially in relation to the securities’ duration.”

The bottom line: If the asset class encounters a rough patch, its relatively high income could provide investors a potential cushion of safety, Kramer contends. He sees the opportunity among high-yield bonds as comparable to that of the stock market, but with more income and potentially less volatility.

“What’s more, the size of the high-yield-debt market has seen an uptick in growth—now reaching about $1 trillion—in addition to the fact that its average credit quality has meaningfully improved in recent years, rising from B to BB,” concludes Kramer.

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Adam Kramer
Portfolio Manager

Adam Kramer is a portfolio manager in the High Income and Alternatives division at Fidelity Investments.

In this role, he manages several multi-asset income funds: Fidelity and Advisor Convertible Securities Funds, Fidelity and Advisor Multi-Asset Income Funds, and Fidelity’s Strategic Fund lineup—Fidelity and Advisor Strategic Dividend & Income Funds, Fidelity and Advisor Strategic Real Return Funds, Fidelity and Advisor Strategic Income Funds, and Fidelity VIP Strategic Income Portfolio. Mr. Kramer also co-manages Fidelity Preferred Securities & Income ETF. In addition, he manages opportunistic high-yield bond strategies for institutional investors as well as a high-income fund available exclusively to Canadian investors.

Prior to assuming his current responsibilities, Mr. Kramer co-managed Fidelity Advisor Equity Income Fund. Additionally, he worked as a portfolio assistant on Fidelity Leveraged Company Stock Fund, Fidelity Convertible Securities Fund, and Fidelity Advisor High Income Advantage Fund. He began working full time at Fidelity in 2000 as a research analyst and has since covered a variety of industries.

Prior to joining Fidelity in 1999, Mr. Kramer worked for RSM Richter in Montreal as a chartered accountant and auditor. He has been in the financial industry since 1994.

Mr. Kramer earned his bachelor of commerce degree in accounting and a graduate diploma in public accountancy from McGill University. He also earned his master of business administration degree from Cornell University.

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