Helios Strategic Income Fund (NYSE:HSA) is a diversified, closed-end management investment company that invests in below investment grade (i.e. junk) bonds. The current stock price of $6.53 represents a great value entry point when compared with more well-known high-yield ETFs - SPDR Barclays Capital High Yield Bond (NYSEARCA:JNK) and iShares High Yield Corporate Bond Fund (NYSEARCA:HYG). The motivation for owning HSA is discussed below, but HSA's yield, discount to net asset value, and credit quality relative to its peers are all reasons to own this fund.
On first glance, the five-year price chart of HSA looks scary. HSA lost approximately 80% of its value during 2008. At the time, HSA was known as the RMK Strategic Income Fund and invested in such things as collateralized debt obligations (CDOs) and asset backed securities. In late 2008, Brookfield Investment Management took control of the fund, renamed it to Helios Strategic Income Fund, and changed the ticker symbol to HSA. The investment thesis was also changed to primarily investing in high yield bonds. Thus, a comparison of pre-2009 to 2009 and beyond is not applicable because HSA's holdings are completely different. I believe that part of the reason for the share price discount to net asset value (as discussed below) is because of HSA's performance prior to 2009.
HSA is composed of investment grade bonds (14% of net assets), below investment grade bonds (65% of net assets), stocks (6% of net assets), and commercial mortgage backed securities (CMBS; 15% of net assets). 80% of the total assets are in bonds, and this is why the comparison to JNK and HYG is made. The 15% of CMBS may scare a potential investor given its negative connotations with the housing crash in 2008-2009. However, all of these holdings are currently valued above HSA's purchase price. From the most recent 10-Q, the current value of all CMBS is $8.5 million versus a cost of $7.8 million. Thus, these securities are aggregately valued at 109 cents on the dollar.
HSA as well as JNK and HYG pay monthly dividends. HSA recently increased its dividend by 14% from $0.035 to $0.04 per share. The current annualized payout of $0.48 per share represents a yield of 7.4% based on the current share price of $6.53. Based on January 6th closing share prices of $40.99 and $94.00 for JNK and HYG translates to annual yields of 6.29% and 6.44%, respectively. The yield on HSA is 106 and 90 basis points higher than JNK and HYG.
Discount to Net Asset Value (NYSE:NAV)
As of January 6th, 2013, HSA's NAV was $7.03. Based on the closing share price of $6.53, the discount is -7.1%. Conversely, the market price of both JNK and HYG trade at their NAV. Any dividend reinvestment performed with the Helios funds is done so at a significant discount.
From January 2011 to January 2012, HSA's NAV increased from $5.99 to $6.37 (+6.3%) whereas the change for JNK and HYG were -3.0% and -0.7%, respectively. From January 2012 to January 2013 HSA's NAV increased from $6.37 to $6.99 (+9.7%) whereas the increase for JNK and HYG were +6.1% and +5.0%, respectively. Over the last 2 calendar years the HSA has outperformed both JNK and HYG in terms of NAV performance.
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Nearly 27% of HSA's assets are rated as BBB, as compared to just 1.1 for JNK and 1.6% for HYG as seen in the table above. Thus, over a quarter of HSA's holdings are of superior credit quality to both JNK and HYG. The amount of B-rated holdings is 39.2% for HSA, or approximately 9 percentage points greater than both JNK and HYG. It should be noted that the below-B and un-rated holdings for HSA are about 10 percentage points greater than both JNK and HYG. So when considering B, below-B and un-rated holdings in total, the three funds are similar. It is the percentage of assets rated BBB where HSA has a distinct advantage over JNK and HYG. Thus, at the current HSA share price, one can get 100 more points of yield and better credit quality in HSA vs. JNK or HYG.
Another interesting exercise is to compare bond holdings from HSA, JNK and HYG. Many of the bonds are owned by each of HSA, JNK, and HYG. For example, without too much work, I was able to identify 5 such holdings:
- Michael's Stores
- Linn Energy
- HCA, Inc.
- Clear Channel Communications
- Avis Budget Car Rental
The takeaway here is that there is significant overlap in the bond portfolios in each of the three funds. There is no reason to discount HSA relative to JNK and HYG.
The Helios Strategic Income Fund represents a nice alternative to either JNK or HYG. HSA provides the investor with an increased yield, discount to NAV, and superior credit quality when compared with the popular junk funds. If an investor wishes to achieve even greater yield at the expense of credit quality, one may wish to look into the various Helios sister funds (HMH and HAV and HIH).
My expectations for 2013 is total return on the order of 20%. 8% of this return will be from the disintegration of the current share price discount, as the value of HSA continues to be realized. Another 7.5% will be from dividends, and the remaining component (roughly 4.5%) will be from continued net asset value appreciation. Based on the NAV trends in 2011 and 2012, I see no reason for this to not continue in 2013.