Equitrust fund focuses on yield, not ratings to outperform junk market in Q2

By Paul A. Harris

St. Louis, Mo., July 29 - Using his own definition of high yield, Bob Rummelhart, fund manager for the Equitrust Strategic Yield Fund, managed to considerably outperform the standard high-yield market in the second quarter of 2002.

In the quarter ending June 30 - during which only 13 of 380 high yield funds reporting to Morningstar.com were in the black - the Equitrust fund returned +2.73%. During that quarter the index returned -4.62%, according to Morningstar.com analyst Steve Murphy.

The Equistar Strategic Yield Fund ran only 33% junk bonds - issues rated below investment-grade by Moody's Investors Service and Standard & Poor's - and changed its name from Equitrust High Yield Fund in early April as it no longer conformed to the Securities and Exchange Commission's rule requiring funds match their name with an 80% weighting in that asset class.

Rummelhart contends that in order to truly identify what is or is not high yield it is necessary to focus on the yield itself, as opposed to the alphabetical designations of the rating agencies.

"People tend to define 'high yield' by rating, not by yield, which is stupid because I can sometimes buy a triple-B name at a higher yield than a single-B, even though the triple-B is investment grade and the single-B isn't.

"That's why we changed the name," he added, "so we can delve in both markets."

According to Rummelhart, as of June 28 the Equitrust Strategic Yield Fund ran 49% investment grade or split-rated names, 8% preferreds and 33% high yield.

Rummelhart cited statistics from the Lehman Brothers US High Yield Index and said that as 2002 got underway it was promising to be a banner year in terms of returns in high yield. Then came June.

"June was the worst month ever," he said. "According to (the Lehman) index June was the worst-ever nominal month at -7.37%, and the second-worst relative month, at -882 basis points.

"In the first quarter the top-performing sector was high yield, with +1.68% return," Rummelhart added.

"During the first quarter high yield outperformed mortgage-backeds, investment-grade credits, and Treasuries.

"But June was so horrible it wiped out everything."

Rummelhart said that new issuance in high-yield market has been of no interest whatsoever to the Equitrust Strategic Yield Fund.

"We haven't focused on it at all," he said.

"And we haven't availed ourselves of any of the fallen angel stuff in the fund, thank God," he added. "We've missed a lot of the time bombs. Eventually I think there is going to be a lot of opportunity in those names. But we're kind of waiting for some of the smoke to clear.

"If we can get the equity market to settle down I think we might see a little bounce back in the high-yield market."

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