MW This winning high-yield bond strategy limits risk while seeking under-the-radar opportunities
By Philip van Doorn
Hunter Hayes of Intrepid Capital described an 'incredibly healthy' market for high-yield bonds and a conservative approach to investing in the space
Two examples of bonds held by the Intrepid Income Fund were those issued by an entity through which 3G Capital acquired Skechers and those issued by Brinker International, which owns Chili's Grill & Bar.
During another good year for the broad stock market, investors should keep in mind that bonds can have a place in a portfolio for diversification and risk management - especially if they need income. According to Hunter Hayes of Intrepid Capital, the high-yield bond space is in strong shape right now, and the market agrees.
Hayes is the chief investment officer for the Jacksonville, Fla.-based firm. He co-manages the $1.4 billion Intrepid Income Fund ICMUX, which is rated five stars (the highest rating) within Morningstar's "Multisector Bond" category. During an interview with MarketWatch, Hayes described how he and his colleagues select bonds, how they manage the portfolio and what special advantage they have over some of their largest competitors.
He also described the high-yield space as "incredibly healthy," partly because corporate borrowers continue to benefit from low interest rates on bonds they issued at low interest rates several years ago. He added that private-credit investors had "taken away a lot of the bottom end of the risk curve."
The case for high-yield funds
High-yield bonds are those with ratings that are considered to be below investment grade by the major ratings firms, or bonds that aren't rated at all. Since a corporate borrower will need to pay a ratings agency (or two) if it wants its bonds to be rated, the agencies face a challenge to remain objective about credit risk.
In general, a bond is considered to be below-investment-grade if it is unrated or if it is rated below BBB- by Standard & Poor's or Fitch, or below Baa3 by Moody's. Fidelity has a useful breakdown of the three agencies' bond ratings.
High-yield bonds generally have more credit risk than investment-grade bonds. Over the long term, this risk-reward paradigm has been lucrative for investors. Here's a comparison of 10-year returns (with reinvested interest payments) for the Bloomberg U.S. High Yield Index with that of the investment-grade Bloomberg U.S. Aggregate Index:
Over the past 10 years, the Bloomberg U.S. High Yield Index has been more volatile than the Bloomberg U.S. Aggregate, but the High Yield Index has been a much better performer.
The chart pattern shows that the high-yield index can be much more volatile, and of course, it reflects a higher credit default rate. But it has also greatly outperformed the investment-grade aggregate over the past decade.
According to Hayes, a reflection of the high-yield market's overall health is that the Bloomberg U.S. High Yield Index has "the highest percentage of BB bonds on record."
Before we proceed, it is time for a few definitions.
-- Bond: A bond is a debt security. A company or government entity issues bonds to borrow money. The issuer pays interest to the bondholders until the bond matures. Interest is typically paid every six months. On the maturity date, the issuer will repay the bondholders the face value of the bonds. Bondholders are free to sell their bonds at any time to other investors, but the prices will depend on market conditions.
-- Coupon: The stated interest rate for a bond, based on its face value. A $10,000 bond with a coupon of 5% will pay $500 a year in interest until the bond matures or until it is called.
-- Maturity date and call date: The maturity date is when the bond will be repaid at face value. Many bonds also feature call dates; an issuer of a bond may call the bond (redeem it at face value or another stated value) on or after the call date.
-- Price: This is a bond's price relative to its face value. If a bond is trading at its face value, we say it is trading at 100, or par. If it is trading at 1% above or below its face value, we say it is trading at 101 or 99, respectively.
-- Yield: The expected rate of return on a bond, expressed as a percentage. It can fluctuate based on the bond's price. The current yield is a bond's coupon divided by its price. A bond trading at a discount to par will have a current yield higher than the coupon. A bond trading at a premium to par will have a current yield below the coupon.
-- Inverse relationship: As bond prices move up and down, bond yields move in the opposite direction to the price.
-- Yield to maturity: A bond's yield to maturity is an annualized figure that factors in its current market price, the coupon and the capital gain or loss the investor would realize if they hold the bond until maturity.
-- Yield to call: A bond's yield to call is similar to the yield to maturity, except that it incorporates the call date rather than the maturity date.
-- Yield to worst: The lower of the yield to maturity and the yield to call. Typically, this will be the only market-price-based yield figure available to you when selecting bonds through a brokerage account, which helps simplify comparisons.
-- Duration: This is a measure of volatility for a bond index or a bond portfolio, expressed as a number of years. The duration of the Bloomberg U.S. High Yield Index is 2.93, according to FactSet. This indicates that if interest rates rise by 1%, the price of the index will decline by 2.93%, and vice versa
According to FactSet, the Bloomberg High Yield Index has a yield-to-worst of 7.01%, while the Bloomberg Aggregate Index has a yield-to-worst of 4.70% and an effective duration of 5.97.
A varied bond-market strategy now focused on the high-yield space
Morningstar has placed the Intrepid Income Fund in its "Multisector Bond" category, but only 10.6% of the fund's portfolio was allocated to investment-grade bonds as of March 31. The rest of the portfolio was mostly high-yield bonds, but contained small amounts of preferred and common stocks.
Hayes stressed that the fund is a "performing credit fund." This is in contrast to some money managers in the high-yield space who specialize in buying heavily discounted bonds of troubled or even bankrupt issuers.
"We look for long-term business for which leverage makes sense in their capital structure. And we look for management teams highly incentivized to pay off our debt. They own equity beneath it, tying up most of their net worth. The only way they can access that value is to repay our debt," he said
In a corporate bankruptcy, bondholders get paid before stockholders. The bondholders may wind up owning the bankrupt company if it is reorganized, or could get back some of their investment if the company is liquidated, while the stockholders would get nothing.
Hayes described a "simple" approach to selecting bonds for investment. For example, when asked about First Brands - the auto-parts maker that filed for bankruptcy in September - he said Intrepid Capital had never invested in the company because he and his colleagues thought the company's financial structure was too complicated. "We could not explain how a dollar flowed through the business," he said.
Hayes became a co-manager of the Intrepid Income Fund in 2019. He said the fund had not taken any credit losses since then. He also said the fund had always been managed to have a short duration - now 1.76. This reduces credit risk, since bondholders are paid more quickly. But it can be a disadvantage when interest rates decline, since longer-duration portfolios will rise in value more rapidly.
"We will not have the advantage of rates declining, but we'll avoid the pain of rates advancing," he said.
Two examples of bonds held by the fund
According to Hayes, the average size for a bond issue in the U.S. high-yield market is $800 million, while the average for issues held by the Intrepid Income Fund is about $400 million. Issues in the smaller category can escape the notice of the largest fund managers, giving the Intrepid team an advantage.
One of the Intrepid Income Fund's at-par purchases was one issued by an entity through which 3G Capital acquired Skechers in June 2025. issued by an entity through which 3G Capital acquired Skechers in June 2025. These bonds have a 10% coupon, and, over the past few days, have traded between 110 and 111. They mature in August 2033, but the call date is July 15, 2028. The premium price reflects investors' confidence in Skechers and 3G, and one should expect some or all of the bonds to be called, at par, on or after that date.
Hayes said the high coupon for the Skechers paper resulted from a "first-time issuer tax" as investors became familiar with the 3G deal. He added, "We don't typically get involved with private sponsors, but 3G is unique." He said he is impressed with the acquiring company's track record for efficiency.
Another interesting credit that he mentioned was Brinker International's $(EAT)$ sole $350 million bond issue. The company owns Chili's Grill & Bar. According to LSEG, Brinker has generated $431 million in free cash flow over the past 12 months, net of dividends. That is uncommitted money, underscoring how easy it would be for the restaurant operator to pay off that debt.
Competing funds
LSEG lists dozens of mutual funds as competitors to the Intrepid Income Fund (which only has one share class) and has calculated one-year returns and longer-term average annual returns through May 31, with dividends reinvested and excluding any sales charges.
The following performance comparison begins with the Intrepid fund and then the Bloomberg U.S. Corporate High Yield Index, which has been the best-performing of the fund's own benchmarks over long periods.
MW This winning high-yield bond strategy limits risk while seeking under-the-radar opportunities
By Philip van Doorn
Hunter Hayes of Intrepid Capital described an 'incredibly healthy' market for high-yield bonds and a conservative approach to investing in the space
Two examples of bonds held by the Intrepid Income Fund were those issued by an entity through which 3G Capital acquired Skechers and those issued by Brinker International, which owns Chili's Grill & Bar.
During another good year for the broad stock market, investors should keep in mind that bonds can have a place in a portfolio for diversification and risk management - especially if they need income. According to Hunter Hayes of Intrepid Capital, the high-yield bond space is in strong shape right now, and the market agrees.
Hayes is the chief investment officer for the Jacksonville, Fla.-based firm. He co-manages the $1.4 billion Intrepid Income Fund ICMUX, which is rated five stars (the highest rating) within Morningstar's "Multisector Bond" category. During an interview with MarketWatch, Hayes described how he and his colleagues select bonds, how they manage the portfolio and what special advantage they have over some of their largest competitors.
He also described the high-yield space as "incredibly healthy," partly because corporate borrowers continue to benefit from low interest rates on bonds they issued at low interest rates several years ago. He added that private-credit investors had "taken away a lot of the bottom end of the risk curve."
The case for high-yield funds
High-yield bonds are those with ratings that are considered to be below investment grade by the major ratings firms, or bonds that aren't rated at all. Since a corporate borrower will need to pay a ratings agency (or two) if it wants its bonds to be rated, the agencies face a challenge to remain objective about credit risk.
In general, a bond is considered to be below-investment-grade if it is unrated or if it is rated below BBB- by Standard & Poor's or Fitch, or below Baa3 by Moody's. Fidelity has a useful breakdown of the three agencies' bond ratings.
High-yield bonds generally have more credit risk than investment-grade bonds. Over the long term, this risk-reward paradigm has been lucrative for investors. Here's a comparison of 10-year returns (with reinvested interest payments) for the Bloomberg U.S. High Yield Index with that of the investment-grade Bloomberg U.S. Aggregate Index:
Over the past 10 years, the Bloomberg U.S. High Yield Index has been more volatile than the Bloomberg U.S. Aggregate, but the High Yield Index has been a much better performer.
The chart pattern shows that the high-yield index can be much more volatile, and of course, it reflects a higher credit default rate. But it has also greatly outperformed the investment-grade aggregate over the past decade.
According to Hayes, a reflection of the high-yield market's overall health is that the Bloomberg U.S. High Yield Index has "the highest percentage of BB bonds on record."
Before we proceed, it is time for a few definitions.
-- Bond: A bond is a debt security. A company or government entity issues bonds to borrow money. The issuer pays interest to the bondholders until the bond matures. Interest is typically paid every six months. On the maturity date, the issuer will repay the bondholders the face value of the bonds. Bondholders are free to sell their bonds at any time to other investors, but the prices will depend on market conditions.
-- Coupon: The stated interest rate for a bond, based on its face value. A $10,000 bond with a coupon of 5% will pay $500 a year in interest until the bond matures or until it is called.
-- Maturity date and call date: The maturity date is when the bond will be repaid at face value. Many bonds also feature call dates; an issuer of a bond may call the bond (redeem it at face value or another stated value) on or after the call date.
-- Price: This is a bond's price relative to its face value. If a bond is trading at its face value, we say it is trading at 100, or par. If it is trading at 1% above or below its face value, we say it is trading at 101 or 99, respectively.
-- Yield: The expected rate of return on a bond, expressed as a percentage. It can fluctuate based on the bond's price. The current yield is a bond's coupon divided by its price. A bond trading at a discount to par will have a current yield higher than the coupon. A bond trading at a premium to par will have a current yield below the coupon.
-- Inverse relationship: As bond prices move up and down, bond yields move in the opposite direction to the price.
-- Yield to maturity: A bond's yield to maturity is an annualized figure that factors in its current market price, the coupon and the capital gain or loss the investor would realize if they hold the bond until maturity.
-- Yield to call: A bond's yield to call is similar to the yield to maturity, except that it incorporates the call date rather than the maturity date.
-- Yield to worst: The lower of the yield to maturity and the yield to call. Typically, this will be the only market-price-based yield figure available to you when selecting bonds through a brokerage account, which helps simplify comparisons.
-- Duration: This is a measure of volatility for a bond index or a bond portfolio, expressed as a number of years. The duration of the Bloomberg U.S. High Yield Index is 2.93, according to FactSet. This indicates that if interest rates rise by 1%, the price of the index will decline by 2.93%, and vice versa
According to FactSet, the Bloomberg High Yield Index has a yield-to-worst of 7.01%, while the Bloomberg Aggregate Index has a yield-to-worst of 4.70% and an effective duration of 5.97.
A varied bond-market strategy now focused on the high-yield space
Morningstar has placed the Intrepid Income Fund in its "Multisector Bond" category, but only 10.6% of the fund's portfolio was allocated to investment-grade bonds as of March 31. The rest of the portfolio was mostly high-yield bonds, but contained small amounts of preferred and common stocks.
Hayes stressed that the fund is a "performing credit fund." This is in contrast to some money managers in the high-yield space who specialize in buying heavily discounted bonds of troubled or even bankrupt issuers.
"We look for long-term business for which leverage makes sense in their capital structure. And we look for management teams highly incentivized to pay off our debt. They own equity beneath it, tying up most of their net worth. The only way they can access that value is to repay our debt," he said
In a corporate bankruptcy, bondholders get paid before stockholders. The bondholders may wind up owning the bankrupt company if it is reorganized, or could get back some of their investment if the company is liquidated, while the stockholders would get nothing.
Hayes described a "simple" approach to selecting bonds for investment. For example, when asked about First Brands - the auto-parts maker that filed for bankruptcy in September - he said Intrepid Capital had never invested in the company because he and his colleagues thought the company's financial structure was too complicated. "We could not explain how a dollar flowed through the business," he said.
Hayes became a co-manager of the Intrepid Income Fund in 2019. He said the fund had not taken any credit losses since then. He also said the fund had always been managed to have a short duration - now 1.76. This reduces credit risk, since bondholders are paid more quickly. But it can be a disadvantage when interest rates decline, since longer-duration portfolios will rise in value more rapidly.
"We will not have the advantage of rates declining, but we'll avoid the pain of rates advancing," he said.
Two examples of bonds held by the fund
According to Hayes, the average size for a bond issue in the U.S. high-yield market is $800 million, while the average for issues held by the Intrepid Income Fund is about $400 million. Issues in the smaller category can escape the notice of the largest fund managers, giving the Intrepid team an advantage.
One of the Intrepid Income Fund's at-par purchases was one issued by an entity through which 3G Capital acquired Skechers in June 2025. issued by an entity through which 3G Capital acquired Skechers in June 2025. These bonds have a 10% coupon, and, over the past few days, have traded between 110 and 111. They mature in August 2033, but the call date is July 15, 2028. The premium price reflects investors' confidence in Skechers and 3G, and one should expect some or all of the bonds to be called, at par, on or after that date.
Hayes said the high coupon for the Skechers paper resulted from a "first-time issuer tax" as investors became familiar with the 3G deal. He added, "We don't typically get involved with private sponsors, but 3G is unique." He said he is impressed with the acquiring company's track record for efficiency.
Another interesting credit that he mentioned was Brinker International's (EAT) sole $350 million bond issue. The company owns Chili's Grill & Bar. According to LSEG, Brinker has generated $431 million in free cash flow over the past 12 months, net of dividends. That is uncommitted money, underscoring how easy it would be for the restaurant operator to pay off that debt.
Competing funds
LSEG lists dozens of mutual funds as competitors to the Intrepid Income Fund (which only has one share class) and has calculated one-year returns and longer-term average annual returns through May 31, with dividends reinvested and excluding any sales charges.
The following performance comparison begins with the Intrepid fund and then the Bloomberg U.S. Corporate High Yield Index, which has been the best-performing of the fund's own benchmarks over long periods.
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MW This winning high-yield bond strategy limits -2-
The table continues with two exchange-traded funds that track broad U.S. corporate high-yield indexes. The State Street SPDR Portfolio High Yield Bond ETF SPHY is designed to track the performance of the ICE BofA U.S. High Yield Index. The State Street SPDR Bloomberg High Yield Bond ETF JNK tracks the Bloomberg High Yield Very Liquid Index of U.S. high-yield corporate bonds with "above average liquidity," per State Street's description of the fund.
Eight actively managed mutual funds follow. These are all of the funds on LSEG's list that are benchmarked to the Bloomberg U.S. Corporate High Yield Index, have total assets of at least $100 million and were launched at least 10 years ago. These are sorted by average returns for 10 years through May 31. There are more notes about the data below the table.
Note: The MML Barings High Yield Fund was known as MassMutual High Yield Fund until Feb. 1.
1-year return 3-year avg, return 5-year avg. return 10-year avg. return Net expense ratio
Intrepid Income Fund; Institutional 7.88% 9.69% 6.23% 5.83% 1.01%
Bloomberg U.S. Corporate High Yield Index 7.57% 9.36% 4.39% 5.88% -
State Street SPDR Portfolio High Yield Bond ETF 7.52% 9.31% 4.49% 5.20% 0.05%
State Street SPDR Bloomberg High Yield Bond ETF 7.70% 9.08% 3.77% 5.04% 0.40%
MML Barings High Yield Fund; Service 8.01% 9.76% 4.73% 5.79% 0.75%
Victory High Yield Fund; A 6.66% 9.52% 2.45% 5.66% 1.02%
Vanguard High-Yield Corporate Fund; Investor 6.98% 8.40% 4.08% 5.20% 0.22%
Hartford High Yield Fund; A 7.98% 8.45% 3.79% 5.18% 0.95%
Guggenheim High Yield Fund; A 4.93% 8.06% 4.02% 5.17% 0.91%
Janus Henderson High-Yield Fund; D 9.72% 9.41% 3.49% 5.11% 0.75%
Morgan Stanley Pathway High Yield Fund 7.18% 8.61% 3.60% 4.77% 0.85%
Thrivent High Yield Fund; A 7.07% 8.14% 3.75% 4.58% 0.81%
Sources: LSEG, FactSet (for Bloomberg U.S. Corporate High Yield Index)
All fund returns are net of expenses. The Intrepid Income Fund has annual expenses of 1.01% of assets, which means annual fees of $101 for a $10,000 investment.
Net expense ratios are shown for all of the funds. These are the full expense ratios except for four of the funds, which are temporarily waiving some expenses:
-- The MML Barings High Yield Fund's DLHYX gross expense ratio for its Service share class is 0.80%, but expenses are being limited to 0.75% until at least Jan. 31, 2027.
-- The Victory High Yield Fund GUHYX has a gross expense ratio of 1.13% for its Class A shares, but expenses will be limited to 1.02% until at least April 30, 2027.
-- The Janus Henderson High-Yield Fund JNHYX has a gross expense ratio of 0.81% for its Class D shares; expenses will be limited to 0.75% until at least Oct. 28.
-- The Morgan Stanley Pathway High Yield Fund's THYUX gross expense ratio is 1.05%, but expenses are planned to be limited to 0.85% through 2026, unless the fund's board of trustees decides otherwise.
The Intrepid Income Fund has outperformed all other funds on the above list for the five-year and 10-year periods, while underperforming the Bloomberg U.S. Corporate High Yield Index slightly for the 10-year period.
The Intrepid fund ranks second for average three-year return, trailing the MML Barings High Yield Fund.
The Intrepid fund ranks fourth for one-year returns through May 31, behind the Janus Henderson High Yield Fund, the MML Barings High Yield Fund and the Hartford High Yield Fund.
Keep in mind that although we have shown one-year performance figures, these funds are all designed to be long-term investments for committed investors seeking income. They have varying strategies and risk profiles, which you should learn about through your own research before making decisions. A patient investor will enjoy a steady stream of income but will also experience periods of price volatility. The returns have been attractive, but patience has been required to achieve solid returns for long periods.
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-Philip van Doorn
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