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The dangers of chasing high yield

Discussion in 'Managed Funds & Index Funds' started by Simon Hampel, 3rd Apr, 2008.

  1. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Location:
    Sydney, Australia
    I decided to have a look at how various income based funds were performing - and was shocked to find that various "high yield" funds (which are often sold as conservative due to their use of fixed interest and "mortgage backed security"). Of course, we all know what has happened to the mortgage market recently - but it's the side effects that I think many people didn't anticipate.

    I also looked through the PDS for some of these investments and nowhere did they detail the risks that these funds are exposed to.

    Down 13.4% this financial year ...

    [chart=CF;PER0299AU;from2;mav;20080403]Perpetual - Merrill Lynch Monthly Income Fund[/chart]

    Down 13% this financial year ...

    [chart=CF;HOW0143AU;from2;mav;20080403]Challenger High Yield Fund[/chart]

    Down 8% this financial year ...

    [chart=CF;PER0374AU;from2;mav;20080403]Perpetual - Credit Suisse Global Hybrid Income[/chart]

    With downside risks like this, you may as well have just invested in the ASX200 ... at least then you'd get some decent upside to balance that risk!
     
  2. crc_error

    crc_error The Rule of 72

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    what are these funds investing in? Cause fixed interest is actually earning more these days.
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It would be the mortgage investments which are causing the problems I'd guess - with so many bad loans going bye-bye, I'd imagine there is a lot of capital loss happening in that market segment.
     
  4. crc_error

    crc_error The Rule of 72

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    so why not just invest into term deposits if your after such income? If your chasing 6-8% yield, thats where I would put my money.
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Some people are after more - and these funds often suggest 10%+ is possible ... remember the adverts for Australian Capital Reserve ?

    The difference between 8% and 10% might not sound like much - but for a retiree looking for money to live on, it can make quite a bit of difference. However, I've always thought that that last 2 or 3% of return increases risk dramatically - to the point where it is often not worth it, and a term deposit would have been a much better choice.
     
  6. Rod_WA

    Rod_WA Well-Known Member

    Joined:
    18th May, 2007
    Posts:
    324
    Location:
    Inglewood, WA
    Hi Sim'
    On the CompareFunds charts, I notice that a flyover gives me the date, cpu and unit price for each distribution (very nice).
    But I can't find the distribution info in a table - which would be great.
    Can I request a table, at the Historical Financial Year Performance tab (or better still, under a Distributions tab:
    ----------------------------------------
    | Date | Distribution (cents) | Unit Price |
    ----------------------------------------

    Also, I found a small bug in the chart engine. Using as an example:
    [chart=CF;HOW0143AU;from2;mav;20080403]Challenger High Yield Fund[/chart]

    the Period pull-down lets me select from 'This quarter' down to 'From 2002-2003 financial year'. The data for the first few years comes back as 'Error in loading data', probably because the data doesn't go back that far?
    So I have to keep trying different years until I get as much data as I can.

    Maybe you could make the pull-down menu based on available data, or at least have an option for 'All available data'.

    Great tool, though. Would just love to have that distribution info.
    Cheers
    - Rod
     
  7. Rod_WA

    Rod_WA Well-Known Member

    Joined:
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    Posts:
    324
    Location:
    Inglewood, WA
    I just did a quick tally of the Merrill Lynch fund. It seems to have distributed only about 5 cents each calendar year, or about 5% yield.
    I bet the distributions are near to fully taxable, too.
    And the unit price is now down about 10% since Dec 2005.
    Woof Woof!