Solid Portfolio Construction

But This 8% Yielder Hasn’t Developed The Track Record

Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.

Investors are continuing to ride the junk bond train, but should they be? Right now, volatility is incredibly low and high yield spreads are historically narrow, which gives the impression that there’s little risk to be found in this group. In reality, there’s little risk being priced in and there’s a big difference between the two. I’ve long been arguing that the premiums currently being commanded by junk bonds are not commensurate with the underlying risks involved. When everything is humming, maybe, but we’re seeing signs that the U.S. economy is slowing, the consumer is cracking, inflation is sticky and the labor market just might be showing signs of fatigue. That makes now an especially dangerous time to be testing the high yield waters.

For those looking for high yield, but perhaps wishing to moderate their risk exposure, the PGIM Short Duration High Yield Opportunities Fund (SDHY) could be a happy medium. It’s still got some pretty significant credit quality risk, obviously, but the limited duration of the portfolio could help mitigate some risk exposure on the interest rate side. Let’s face it, if yields are going to blow out, everything in the junk bond space is going to get hit hard, but SDHY might come with a gentler approach.

Fund Background

The Fund seeks to provide total return, through a combination of current income and capital appreciation by investing primarily in below investment‐grade fixed income instruments. The Fund seeks to maintain a weighted average portfolio duration of three years or less and a weighted average maturity of five years or less. SDHY also utilizes leverage in order to enhance yield and total return potential.