Mutual Funds in Junk Can Also Provide a Tax Shelter
The smartest way for most individual investors to own junk bonds is through mutual funds. You get the benefits of diversification and professional management. And nowadays, you get something else: a tax shelter.
Because junk bond funds racked up giant trading losses in 1989 and 1990--when they were forced to sell bonds at a loss to pay off shareholders who were pulling out--the funds now have huge tax-loss carry-forwards sitting on their books.
The Vanguard High-Yield Corporate fund, for example, has tax losses of $255 million on its $1.7-billion portfolio. That means that any capital gain the fund might reap in the near future--from selling rebounded bonds at a profit--will be offset by the tax losses still on the books. Result: Capital gains that the fund produces for shareholders are sheltered from taxes until the old losses are used up, which could take years.
Ordinarily, mutual fund shareholders must pay taxes each year on whatever capital gains their funds record.
As an example of how lucrative the tax shelter can be, the T. Rowe Price High Yield fund earned a “total return” of 31% last year: 14% from interest earnings and 17% from capital gains. The interest earnings were taxable to the fund’s shareholders, but the 17% return from capital gains was not, says fund manager Dick Swingle in Baltimore.
Glen King Parker, who publishes the Income & Safety investment newsletter in Ft. Lauderdale, Fla., advises his subscribers to keep at least one-fifth of their investment portfolios in junk. He suggests splitting the money among at least three junk mutual funds to further diversify your holdings. His fund picks for 1992 are in the accompanying table.
One Pro’s Junk-Fund Picks
Glen King Parker, publisher of Income & Safety newsletter, recommends these no-load (no sales charge) junk bond mutual funds as today’s best bets.
Fund/ Minimum Total return phone number investment 1991 Yr.-to-date Financial Funds High Yield 800-525-8085 $250 +24% +3.3% Nicholas Income 800-227-5987 $500 +23% +1.5% Northeast Investors Trust 800-225-6704 $1,000 +26% +4.7% T. Rowe Price High-Yield 800-638-5660 $2,500 +31% +4.6% Vanguard High-Yield Corporate 800-662-7447 $3,000 +29% +2.5% Junk bond index +35% +5.7% Long-term Treasury bond index +18% -3.1%
Fund/ phone number Yield Financial Funds High Yield 800-525-8085 10.1% Nicholas Income 800-227-5987 9.6% Northeast Investors Trust 800-225-6704 13.6% T. Rowe Price High-Yield 800-638-5660 10.4% Vanguard High-Yield Corporate 800-662-7447 10.4% Junk bond index 12.1% Long-term Treasury bond index 7.6%
Source: Merrill Lynch & Co. (bond indexes); funds listed; Income & Safety newsletter
