We’ll assess the risk of your high-yield bond mutual fund in two ways:
- Credit rating breakdown of holdings
- SEC (Securities and Exchange Commission) N-Q filings
A brief about SEC’s form N-Q
The US SEC requires investment management companies to file form N-Q twice a year. The filing has to be completed within 60 days of the end of the first and third quarters of each fiscal year. Investors should remember that funds have different fiscal years, so their filing periods are different
The N-Q filing contains an entry in which the investment companies classify the assets held by a mutual fund scheme into three levels from Level 1 to 3. Level 1 assets are the most liquid among the lot while Level 3 are the least liquid.
Let’s begin with the Vanguard High-Yield Corporate Fund – Investor Shares (VWEHX).
VWEHX: Credit rating breakdown
As of September 2015, the latest available information, 45.5% of its assets were invested into BB rated papers, while another 39.5% were invested into B rated papers. About 8.1% of the portfolio was invested into papers rated below B and unrated papers combined.
VWEHX filed its latest N-Q form on December 22, 2015. The information in the filing is as of October 2015.
The fund had been managing assets worth $17.7 billion as of the end of November. It had all of its corporate bond holdings classified as Level 2. All of its US government and agency obligations were also classified as Level 2.
From these filings, VWEHX looks like one of the safest funds to be around in case liquidity dries up temporarily. The fund mainly avoided investing in the deep end of the junk category. It has a large portion of its assets invested into the top tier of junk bonds. However, a sizable 9.2% of its assets were invested into the energy sector. Investors should watch out for this area of the fund.
Let’s look at the American Funds American High-Income Trust – Class A (AHITX) in the next part.