A reader recently asked me about Dreyfus High Yield Strategies Fund (NYSE:DHF), a closed-end fund I've looked at before. The quick take is that it's nothing to get excited about, but it isn't exactly a horrible fund, either. That said, it is worth a deeper dive after a difficult 2015.
First off, what's it do?
Dreyfus is pretty bad when it comes to explaining what DHF actually does. This isn't unique to this fund or to Dreyfus - a lot of closed-end fund sponsors don't share as well as they should. If that's a problem for you, DHF isn't a good option. I believe strongly that you should know what you own, and that's hard to do here.
That said, DHF is a high-yield bond fund, as its name obviously implies. The primary objective is income, with a secondary objective of capital appreciation. In its efforts to meet these goals management can use leverage. Although leverage helps increase the company's ability to pay out high distributions, it can exacerbate losses in bad markets.
Since that's about as much information as Dreyfus cares to share, you need to go back to the fund's 1998 prospectus to see what's under the covers. According to that document, which may not be exactly what's done today, about 65% of the fund's assets must be invested in U.S. securities, a maximum of 25% can be in foreign-denominated bonds, and up to 10% of assets can be invested in bonds where the issuing company is in the midst of bankruptcy proceedings. A mixture of top-down and bottom-up techniques are employed when investing, with management looking at things like industry trends, management strength, and a company's borrowing requirements and ability to repay its debt. In short, aside from the use of leverage, DHY is a pretty run-of-the-mill high-yield bond fund.
How's it done?
Now for the bad news... 2015 was a rough one for DHF. The fund turned in a net asset value loss of around 6% for the year. That's a total return figure, which includes the reinvestment of distributions. If you lived off the payments, which are fairly substantial, with the recent distribution yield topping 12% based on the market price of the fund, you did worse than that. With an around 7% discount to net asset value, or NAV, the NAV yield is a bit lower, but still material. It's worth noting that the current discount is narrower than the average over the past three years of nearly 10%.
Still, a loss of 6% compares well to the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA:JNK), which turned in a loss of around 7.2% last year. (Score one for active management.) Notably, 2015 was the first annual loss for the fund since 2008. So, in some ways, it wasn't as bad a year as it at first seems. But that doesn't soften the blow of a down year. It just shows that 2015 was a hard one for high yield. Most of the pain for DHF came in the third and fourth quarters as investors started to grow increasingly worried about risky investments, like junk bonds.
Looking under the numbers a little, management avoided some of the pain in the oil patch and in commodities, since it chose to underweight those sectors relative to benchmarks. That helps explain the fund's ability to outdistance JNK. The benefit of reduced exposure to the worst-hit areas, however, was likely offset by the use of leverage in a down market. Essentially, when investors get into a risk-off mood, there's really no place to hide if all you can own is high-yield debt. Leverage clearly worked against DHF investors this time around.
But to be fair, DHF appears to have held its own in 2015. That's not great, but it's hardly an indictment of the fund. I'm left with the same end result as I've come to before - it's an OK fund, but not one to get excited about. And with a narrower discount than usual, there's even less reason to get excited.
What to do now?
If you are looking for high-yield exposure, DHF will fill that niche. The bigger question you might want to ask is if high yield is the right place to be in a market that's increasingly concerned about risk. There's few other places you can go to find riskier investments than the junk bond sector. Since Mr. Market tends to throw the baby out with the bathwater, even the best junk bond funds (I wouldn't put DHF in that category) are likely to continue feeling the hit of a shunned sector.
And things aren't getting better. The fund's net asset value fell nearly 4.7% through the first 15 days of the new year. For reference, JNK lost "only" 3.7% or so. (Score one for index funds.) This reversal suggests to me that fear is spreading beyond select sectors to encompass anything risky, and DHF's leverage is working against it as the pain spreads. Still, fifteen days is hardly a full year, so there's a lot that could happen in the next 11 months or so, but this shows the impact of market volatility on an already volatile sector.
Which is why it might be helpful to juxtapose DHF and JNK against some higher-quality debt options. The SPDR Barclays Capital Short Term Corporate Bond ETF (NYSEARCA:SCPB) was basically breakeven over the 15-day span, and the SPDR Barclays Short Term Treasury ETF (NYSEARCA:SST) was up about half a percent or so. Clearly, safety is being favored right now.
So, if you are looking for high-yield exposure, DHF is fine if you own it. I wouldn't go running out to buy it at a narrower discount than usual. But if you own it or are looking at it, be certain that junk is what you really want right now. Sure, stepping down to "safer" debt will trim your income, but it could help preserve your capital.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.