Published Wed, 06 Apr 2016 16:13:15 -0400 on Seeking Alpha
"He who doesn't risk never gets to drink champagne." As investors, we can all relate to this Russian proverb. But in choppy markets, big risks can be hard to stomach. A low-volatility strategy can help.
We all know we have to take some risk to get returns. High-yield investors who rely on their portfolios to generate income know it better than most. But during periods of volatility, high-income assets often get whipsawed by changes in market sentiment and outlook. That can expose investors to more downside risk than they're comfortable with.
Abandoning high yield altogether, though, is risky. Sizable corrections aren't unusual, but high-yield bonds tend to rebound quickly.
So how can investors stay the course and generate the income they need without taking undue risk? We think they should consider a two-pronged strategy: shorten duration and focus on quality.
Over time, our research shows that high-quality, short-duration bonds have dampened portfolio volatility and held up better in down markets (Display 1).
When we zero in on 2015 - a particularly turbulent year for high yield and other return-seeking assets - we see a similar pattern (Display 2).
In our view, a strategy that combines bonds with these characteristics and tactical hedging strategies, such as the use of credit default swaps, can make it easier for investors to stay in the high-yield market without losing too much sleep.
Shorter Duration, Smoother Ride
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|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|MFS HIGH INCOME MUNICIPAL TRUST||5.22||0.0||0.00||0.29||5.05|
|PIONEER MUNICIPAL HIGH INCOME TRUST||12.28||0.0||0.00||0.00||4.59|
|WESTERN ASSET MUNICIPAL HIGH INCOME FUND||7.65||0.0||0.00||0.00||3.99|
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