Practical scholarly advice on junk bonds

Investing in Junk Bonds: Inside the High Yield Debt Market, by Edward I. Altman and Scott A. Nammacher. New York: John Wiley & Sons. 257 pp. $24.95. Many investors find nothing quite so appealing as the fat, double-digit return of a low-grade, high-yielding junk bond.

In two years, the number of junk bond mutual funds has doubled, to nearly 50. Since 1978, the market has swollen from $22 billion to more than $120 billion. Almost every major Wall Street brokerage is scrambling for a piece of the action underwriting junk bonds. Some 20 percent of all new corporate debt is in this category.

Now Edward Altman, a New York University finance professor, and Scott Nammacher, a former Morgan Stanley & Co. consultant, have put together a comprehensive textbook on the subject. Using their research on default rates and market studies done for Morgan Stanley, the authors provide plenty of grist for the number-crunching professional.

The uninitiated may find some tough sledding here. But any investor with a passing interest (or a fixed-income portfolio) will find worthwhile sections detailing the development and scope of this nascent market.

The chapter on junk bond mutual funds is worth the price of the book.

This chapter is written for individual investors. The authors surveyed the funds in existence in 1985 and got back 33 responses, which accounted for 75 percent of the junk bond assets under management.

Each fund's portfolio is broken down by percentage of high- and low-quality debt. The authors discovered that some funds actually had as much as 24 percent of their ``junk bond'' holdings in high-quality corporate debt.

The book analyzes each fund's level of diversification, crucial to reducing risk. By one measure, Venture Income Plus and Dean Witter High Yield were the least diversified, with more than 57 percent of their money invested in a narrow group of large junk bond issuers. But the two were also among the best performers in 1985.

Manufacturing, entertainment, and finance companies accounted for more than 50 percent of the junk bonds portfolios. Among manufacturers, Irwin Jacobs's holding company, Minstar, proved most popular with fund managers (in 60 percent of the portfolios). Mattel was the top entertainment company (in 51 percent of the funds). ICH Corporation (45 percent) was the favorite from finance.

Which company, if it defaulted on its loans, would nick the most funds? At the time of the survey, it would have been a struggling nuclear utility. Consumers Power, Middle South Energy, and Long Island Lighting were the most widely held companies among the funds.

There is one shortcoming to the fascinating data: They are now more than a year old. Nonetheless, the book offers a frame of reference for assessing junk bond portfolios. As a scholarly text and practical primer, this is a high-yield investment.

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