The Value Line Mutual Fund Survey

Model Portfolio Asset Class-High- Yield Bond

High-yield bonds have underperformed in 2008. The Lehman Brothers High-Yield Bond Index posted a loss of just under 6% in 2008, as of August 31st, more than seven percentage points below the Lehman Aggregate Bond Index. Major disruptions have occurred recently in the financial markets, both here and around the world. Federal Reserve Chairman Bernanke recently warned that such disruptions will not only affect current economic performance, but could also prolong the downturn. The Fed, in unison with other countries, lowered the Federal funds rate to 1.5% from 2%. The Fed said it will continue to monitor developments in the financial markets and act accordingly, since the tightening of credit conditions has the potential to intensify the housing correction and restrain economic growth. Defaults by speculative-grade companies are rising, putting more pressure on the high-yield bond Index. Therefore, high-yield bond performance could still underperform higher quality issues. Nevertheless, as a longer-term strategy, we recommend high-yield bonds be a part of every subscriber’s fund portfolio, except for aggressive investors with a long time horizon. This month, we will examine several High Yield Bond funds that we follow in the Mutual Fund Survey.

Putnam High-Yield A Fund (PHIGX) is best suited for greater-risk investors. The fund seeks a high level of current income, while capital appreciation is secondary. Management’s investment strategy is based on the research of one of the country’s largest high-yield buy-side staffs. It employs a flexible strategy that allows the fund to shift portfolio allocations in order to benefit from changes in the high-yield market. Management begins with a top-down approach. Foremost in the selection process is fundamental analysis, looking at the basic financial numbers of a company and talking with management, suppliers, and customers.

The fund’s total return was –1.60% for the eight months ended August 31st, outperforming the Lehman Brothers High-Yield Bond Index, and much of its peer group. Its longterm performance is outstanding, outpacing both its objective group and the Lehman Aggregate Bond Index over the trailing three, five-, 15-, and 20-year periods as of August 31, 2008. To obtain more information on this fund, call (800) 225-1581, or visit the Web site at www.putnam.com.

Investors with slightly less risk tolerance may want to look at Federated High Income Bond Fund A (FHIIX). The fund pursues high current income by investing in corporate debt obligations rated BBB or lower. The majority of its assets tends to be invested in B-rated bonds. Management employs a bottom-up investment approach, and usually maintains a portfolio of over 100 bonds issued by larger, high-quality companies spanning over 30 industries. It seeks firms that show an ability to improve their creditworthiness over time. Management relies on in-house credit analysis that focuses on the financial soundness of each security, i.e., its responsiveness to changes in interest rates and business conditions, as well as cash flow, interest or dividend coverage, and earnings

The fund’s total return was –2.20% for the eight months ended August 31, 2008, outperforming the Lehman Brothers High-Yield Bond Index and much of its peer group. Its long-term performance is good, outpacing both most of its objective group and the Lehman High Yield Bond Index over the trailing five-year period as of August 31, 2008. To obtain more information on this fund, call (800) 341-7400, or visit the Web site at www.federatedinvestors.com.

Investors with lower risk tolerance may want to look at Morgan Stanley High-Yield Securities Fund I (HYLDX). The fund seeks a high level of current income; capital appreciation is a secondary concern. The fund normally has at least 65% of its net assets in lower- and non-rated fixed-income securities. Management may invest in money market instruments without limit if it believes market conditions call for such a defensive strategy.

The fund’s total return was –0.76% for the eight months ended August 31, 2008, outperforming the Lehman Brothers High-Yield Bond Index and much of its peer group. Its long-term performance is respectable, outperforming the Lehman High-Yield Bond Index over the trailing one, three, and five-year periods as of August 31, 2008, while outperforming most of its objective group during those same time frames. To obtain more information on this fund, call (800) 869-3326, or visit the Web site at www.morganstanley.com.