Oil prices collapsing below $30 a barrel has led to a "meltdown" in junk bonds in the first half of December, but non-traditional bond funds' poor performance in November may have portended the selloff. After posting aggregate gains of 0.73% in October, Morningstar's non-traditional bond fund category lost 0.39% in November, and the worst-performing fund fell by more than 6%.
November's Top Performers
The month's top-performing non-traditional bond fund was the Sit Rising Rate ETF (RISE), which gained 3.31%. The fund debuted in February, and thus doesn't have long-term or even year-to-date data, but its shares were down 3.44% since inception as of November 30.
The ProShares CDS Short North American HY Credit Fund (WYDE) was November's second-best performer in the non-traditional bond fund category, with gains of 2.11%. The fund, which debuted on August 5, 2014, was down 1.31% year-to-date and 0.85% for the year ending November 30.
The Deutsche X-Trackers Investment Grade Bond Interest Rate Hedged ETF's (IGIH) 1.52% gains were enough to put it in the category's top three for the month. Like the month's top performer, IGIH, debuted in 2015 and thus doesn't have a one- or three-year track record. Its shares debuted at $25.16 on March 3 and closed at $24.30 on November 30 - down 3.41% since inception.
November's Worst Performers
The Highland Opportunistic Credit Fund (HNRZX) is the only fund from either list with a three-year track record - and it was also November's worst performer, by a long shot, at -6.27% for the month. For the eleven months ending November 30, the fund was down a painful 19.28% - and when you add in December 2014's losses, its one-year return through November 30 stood at -24.07%.
The Catalyst/Princeton Hedged Income (HIFAX) and Nuveen Symphony Dynamic Credit (NSLAX) funds were the next-worst performers, but their respective losses of 2.92% and 2.81% were modest in comparison to HNRZX's. This is also true in terms of their year-to-date and one-year returns, with HIFAX posting respective returns of -4.83% and -6.49% for those periods, and NSLAX at -3.29% and -5.74%. Because both funds were launched in 2014, they don't have three-year data.
Beta, Alpha, and Sharpe Ratio
With only one fund in six at least three years old, only November's worst performer - the Highland Opportunistic Credit Fund (HNRZX) - can be analyzed in terms of its three-year beta, alpha, and Sharpe ratio. How do its numbers compare to those of the category average?
Well for starters, Morningstar's non-traditional bond category as a whole returned an annualized +0.87% for the three years ending November 30. These returns generated an alpha of 0.51% relative to the Barclays Capital Aggregate U.S. Bond Index. The category's three-year standard deviation of 2.98 is a measure of its volatility. Its 0.35 three-year Sharpe ratio measures return per units of risk (i.e., "risk-adjusted returns").
Despite its 24.07% losses over the year ending November 30, HNRZX remained in the black for the three-year period ending that day, at an annualized +0.93%. Its three-year beta of -1.38 indicates a dramatically inverse correlation to the Barclays Capital Aggregate U.S. Bond Index benchmark, and its 4.08% three-year alpha shows healthy outperformance. But HNRZX's three-year standard deviation of 15.55% shows it has given investors a bumpy ride, and its 0.13 Sharpe ratio indicates relatively little return for each unit of risk.
Past Performance does not necessarily predict future results.
Meili Zeng and Jason Seagraves contributed to this article.