Title: Top High-Yield Bond Funds: Morningstar's Shiny Picks, Stripped Bare
Diversified high-yield bond funds—the siren song for fixed-income portfolios seeking a little extra juice. Morningstar analysts have released their picks for the best options, based on returns over the past one, three, and five years. Fidelity gets two spots, and all selections are actively managed. Let's dissect these "top performers," shall we?
The Winners' Circle: A Closer Look
The funds that passed Morningstar's screen are: Artisan High Income Fund (APHFX), BlackRock High Yield Portfolio Fund (BRHYX), Fidelity Advisor Capital & Income Fund (FIQTX), Fidelity Capital & Income Fund (FAGIX), and Franklin High Income Fund (FHRRX). The category average return for the last 12 months was 6.68%. High-yield bond funds returned an annualized 8.83% over three years and 4.42% over five. Not bad—until you compare it to the Morningstar US Core Bond Index, which returned 6.48% over the last 12 months, 4.73% per year over the last three years, but lost 0.40% per year over the last five.
This raises a question: Are these "top-performing" high-yield funds truly superior, or are they just benefiting from a broader market trend? And more importantly, are investors being adequately compensated for the increased risk they're taking on? (High-yield bond portfolios, remember, invest in lower-quality, riskier bonds.)
Morningstar screened for funds in the top 25% of the category using their lowest-cost share classes and Medalist Ratings of Bronze, Silver, or Gold. They excluded funds with assets under $100 million and less than 100% analyst coverage. This methodology, while seemingly robust, has a few potential flaws.
First, focusing on the lowest-cost share classes can be misleading. Many of these are inaccessible to individual investors, skewing the perceived performance. Individual investors might be stuck with share classes carrying higher fees, which would eat into their returns. Second, the Medalist Ratings may differ among share classes, adding another layer of complexity.
Individual Standouts: Peeling Back the Layers
Let's dig into a couple of these funds.
Artisan High Income Fund (APHFX) has gained 7.56% over the past year, outperforming the category average of 6.68%. It's up 9.99% over the past three years and 6.07% over the past five. Brian Moriarty, a principal at Morningstar, notes that the fund's institutional share class has beaten at least half of its category peers every year from 2015 through 2024. Adjusted for volatility, its information ratio was better than all but one peer over the trailing 10 years through March 2025.
BlackRock High Yield Portfolio Fund (BRHYX) has climbed 7.83% over the past year, also outperforming the category average. It's up 10.06% over the past three years and 5.27% over the past five. Jeana Doubell, another Morningstar analyst, highlights the fund's flexible approach, emphasizing higher-quality bonds when riskier debt offers paltry compensation. The team also invests in ETFs, credit default swaps, and total return swaps.
Fidelity's funds, FAGIX and FIQTX, have gained 9.33% and 9.38% respectively over the past year. Max Curtin, yet another Morningstar analyst, credits the research engines powering these unconventional high-yield portfolios. These funds often feature upwards of 20% in common stock.
Franklin High Income Fund (FHRRX) has gained 7.90% over the past year. Maciej Kowara, a Morningstar principal, points to the acquisition of Putnam and the integration of its fixed-income team as a crucial factor. The team's fundamental approach centers on intensive issuer analysis.
But here's what I find genuinely puzzling: While these analysts praise the managers' "flexible approach" and "intensive issuer analysis," they don't provide concrete examples of how these strategies translate into superior returns. Are the managers simply lucky, or do they possess a unique skill that consistently generates alpha? The report leaves this question unanswered.
The report also mentions that the Franklin High Income Fund struggled in 2014-15 due to "overly bold energy calls" but has avoided similar missteps since. This raises another question: How much of a fund's past performance is attributable to skill versus luck? And how can investors differentiate between the two?
Are These Funds Actually Worth It?
Ultimately, while Morningstar's analysis provides a useful starting point, it's crucial to conduct your own due diligence before investing in any high-yield bond fund. Don't rely solely on past performance, and be sure to consider the risks involved. (High-yield bonds are, by definition, riskier than investment-grade bonds.) And remember, past performance is never a guarantee of future results—a cliché, I know, but clichés exist for a reason. For more information, see 5 Top-Performing High Yield Bond Funds.