Some weeks ago my colleague wrote an article entitled “Junk Bonds may not be so Junky”, and today I want to expand on that a bit. For the benefit of those readers who did not see my colleague’s article, a junk bond or high yield bond is defined as any bond that is rated below investment grade. This includes Government of Jamaica bonds, Venezuela, and the Sagicor bond.

As she correctly suggested in her article, when one thinks of junk bonds, immediately risk comes to mind. Throughout our writings we have been encouraging investors not to be afraid of risk.

In fact, virtually everything that one does involves some form of risk, and so the way to deal with it is simply to do a good assessment of it, especially with regard to determining whether the prospects of that risk could become your reward.

Entrepreneurs and business leaders are very much familiar with taking risks … that is how they build great companies. And it should be the same for the individual investor… that is how you will build great wealth.

A few months ago, as is typical in a market cycle, the market was down, and this of course included most bonds, with one notable exception being US treasuries. This caused some investors to get a little jittery, but it proved to be short-lived and in fact, the prices were quietly and steadily climbing very shortly after. This occurred in the context of a normal market cycle.

Well, needless to say, the recovery came, and most of us lost the opportunity.

Remember, though, that at this moment in time we all have the benefit of hindsight (we didn’t then … and couldn’t, for obvious reasons), and I hasten to say it was not an easy call to buy into such bonds at a point in time when prices were somewhat depressed. At that time the market was uncertain and the pessimists were all speaking out, so it was understandable that purchasing such bonds may not have seemed like a good idea. Nevertheless, the risk paid off. And this takes me back to my original point – that one needs only to properly assess a risk and, if feasible, take it!

Let us look at the benefit of “being greedy when others are fearful” (Warren Buffett). If you had bought $100,000 worth of a bond on November 4, 2015 at a price of 80 (paying $80,000 for it), and the price moved up to 107 on May 4, 2016, you would now have $107,000 and would have made a capital gain of $27,000 or 33 per cent in just six short months!

Take a look at the other examples in the following table (these are all junk bonds, and the prices quoted are actual prices taken from Bloomberg).

Bond Sector Date Price FV

In the examples in the table above, the lowest capital gains came out at 26% (ie for the Muni 10 per cent bond – $21,760 divided by $85,240) for a period of 202 days (ie 12 October 2015 to 4 May 2016) – a period of less than one year. The highest was 54 per cent for the Energy 6.375 per cent, and this was for only 70 days, less than three months!

These are some fantastic movements over such short periods, and confirms that an investor can make good money in the bond market. There were many other bonds with similar huge movements during this period of time, although one must remember that the period under review was an extremely volatile time. And speaking of time, one must remember that timing is everything!

The important point is to invest in bonds with strong fundamentals.

Of course, I am not suggesting that an investor should use funds he has set aside for a special purpose (such as paying for his heart surgery in a few months’ time) to purchase high yield bonds.

One should have a balanced portfolio. So if you have $200,000 sitting on a repo account rolling year after year for the past six years, perhaps it is time to look at investing in some good bonds.

Pamela Lewis is Vice President, Investments and Client Services at Sterling Asset Management Ltd. Sterling provides financial and advisory services to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, please e-mail us at: info@sterlingasset.net.jm or visit our website at www.sterling.com.jm