Fund Performance
High-yield bonds continued their remarkable performance
Investor demand for high-yield bonds remained robust during the third quarter. According to AMG Data Services, high-yield mutual funds have experienced net inflows of more than $25 billion for the year to date, the highest levels since 2003. New issuance in the primary market was active, as 90 new issues were priced during the quarter for nearly $40 billion. Net new issuance for the year to date has now surpassed the previous annual record set in 2001. The forward calendar stood at $600 million at the end of September.
In this environment, the Credit Suisse High Yield Index returned 14.1% for the third quarter. All of its industries posted positive returns. For the year to date, the index is up 45.2%. By comparison, the 10-year Treasury posted a 2.8% return for the quarter. The yield difference between Treasuries and high-yield securities narrowed by more than 200 basis points during the quarter, ending the period at approximately 760 basis points. The yield-to-worst declined to 9.8% and the average price of a high-yield security increased to nearly $88. High-yield returns were just short of the S&P 500 and Nasdaq Composite, which gained 15.6% and 15.9%, respectively.
Columbia High Income Fund’s return was just short of the return of its benchmark, the Credit Suisse High Yield Index, and the average return of its peer group, the Lipper High Current Yield Funds Classification.
Key industries and security selection drove positive performance 1
Manufacturing holdings made the largest positive contribution to the fund’s performance. An overweight in health care also boosted returns. Security selection in information technology and financials, specifically in the insurance industry, were also positive contributors.
Conservative positioning hampered relative return
The fund’s relatively conservative risk profile hampered the fund’s returns relative to its benchmark and peer group, as the lowest quality securities continued to outperform higher quality securities. Overweights in the energy, utilities and transportation sectors also detracted from performance, as did certain media/telecom holdings.
Market outlook
As lower quality credits continued to outperform higher-quality credits by a significant margin, the high-yield market seems to be assuming that the worst of the recession is over. As measured by the Credit Suisse High Yield Index, the split-B versus BB spread premium narrowed to approximately 350 basis points at the end of September 2009, down from 1,414 basis points at the end of November 2008. To our way of thinking, this reflects a full valuation of weaker credits in the best of economic environments. However, we maintain our conviction that the current economic weakness will be more prolonged than current market spreads reflect. In keeping with our investment process, the fund remains underweight in the riskier part of the high-yield market, given the market activity to date in 2009.
Performance data quoted represents past performance, and current performance may be lower or higher. Past performance is no guarantee of future results.
Please read and consider the investment objectives, risks, charges and expenses for any fund carefully before investing. For a prospectus, which contains this and other important information about the fund, contact your Columbia Management representative or financial advisor or go to www.columbiamanagement.com.
The Credit Suisse First Boston (CSFB) High Yield Index is a broad-based index that tracks the performance of high-yield bonds.
The Standard & Poor’s (S&P) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks.
The Citigroup 10-year Treasury Index computes returns for the 10-year on-the-run Treasury that has been in existence for the entire month. 1 Determinations of contributors and detractors are based on performance relative to the fund’s benchmark.
Unlike mutual funds, indices are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index.
Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will come to pass. The views and opinions expressed are those of the portfolio managers and analysts of the affiliated advisors of Columbia Management Group, are subject to change without notice at any time, may not come to pass and may differ from views expressed by other Columbia Management associates or other divisions of Bank of America. These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security or sector.
There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions made in the future will be profitable or will equal the investment performance of the securities discussed herein.
Columbia Management Group, LLC (“Columbia Management”) is the investment management division of Bank of America Corporation. Columbia Management entities furnish investment management services and products for institutional and individual investors. Columbia Funds are distributed by Columbia Management Distributors, Inc., member FINRA and SIPC. Columbia Management Distributors, Inc. is part of Columbia Management and an affiliate of Bank of America Corporation. |