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Outflows Slow From Junk Bond Funds Though Bad News Keeps Coming

December 18, 1989

NEW YORK (AP) _ Investors have slowed their stampede from junk-bond mutual funds in recent weeks as a revisionist school of thought on the risky investments has emerged.

It goes like this: Junk bond prices are so low that they can only go up, and the generous yields on the bonds more than compensate for any risk that the bonds will default.

″I think what we’ve probably attracted are some bottom fishers,″ said Neal Litvack, a spokesman for mutual-fund operator Fidelity Investments. ″A lot of people have felt that the correction has taken place, the headlines are positive, and they’re going to come in at a decent share price.″

Investors began pulling out of junk bond mutual funds in late summer, apparently due to news reports of trouble at highly indebted junk bond issuers such as casino operator Resorts International Inc. and department store owner Campeau Corp.

For example, the junk-bond fund run by T. Rowe Price lost 28 percent of its assets from Sept. 1 through Nov. 30., though some of that was due to a decline in the price of the bonds.

But Price and other operators of major junk bond mutual funds say they’ve seen a slowdown in outflows in recent weeks. Fidelity’s fund even saw a net inflow of money two weeks ago.

″There might be a contrarian undercurrent out there that, given the very high yield, it might be commensurate with the risks involved,″ said Brian Mattes, a spokesman for Vanguard Group, another mutual fund operator.

Junk bonds are issued by companies that have a poor credit rating or no rating at all. They also are used to fund leveraged buyouts. Because of their risk of default, they yield more than investment-grade corporate bonds.

Junk bonds are no place to put retirement savings. At best, they are suitable for surplus funds that an investor is willing to lose should the gamble falter. Many advisers say small investors should steer clear of them under any circumstance.

But recently, as the prices of junk bonds have hit new lows, some experts have proclaimed them a good investment despite the fact that some of the bonds may default.

Dick Swingle, the manager of T. Rowe Price’s junk-bond mutual fund, said earlier this month that he considers the high-yield market ″one of the most undervalued capital market sectors.″

″In our opinion, today’s negative environment for high-yield bonds is a window of opportunity for the long-term investor,″ he said.

Mutual fund operators say junk-bond funds react sharply to news reports about junk bond issuers and the high-yield market in general. Litvack said Fidelity’s $1.45 billion junk-bund fund is the most news-sensitive he’s seen.

″What it tells you is that people are not terribly secure about that investment,″ he said.

A recent New York Times story headlined ″The New Lure of Junk Bonds,″ which described how some money managers see values in junk, may have stimulated junk fund investments. But headlines last week about Campeau’s assertion that it might have to place its department store divisions in bankruptcy reorganization had the opposite effect.

Litvack said an investor in a junk fund that pulls his money based on news reports ″might be better off elsewhere. This fund is not for people who are faint of heart.″

Junk fund operators say they take pains to warn potential investors of the risk.

But the risk has its reward: Vanguard’s $946 million junk-bond fund yielded 13.24 percent last week, compared with 7.92 for its Treasury fund, a benchmark for safety.

However, junk fund yields have varied wildly from year to year, making a junk fund suitable for long-term investors only. For example, Vanguard’s fund yielded only 2.65 percent in the year ended Sept. 30, 1987. But in the year ended Sept. 30, 1988, it yielded 13.55 percent.

″One year of negative returns can be fully expected with this type of fund,″ Mattes said.

End Adv for Dec. 18

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