Pioneer High Yield Fund

Transcription

1 Pioneer High Yield Fund COMMENTARY Performance Analysis & Commentary September 2015 Fund Ticker Symbols: TAHYX (Class A); TYHYX (Class Y) us.pioneerinvestments.com Third Quarter Review Pioneer High Yield Fund s Class A shares returned 6.84% at net asset value in the third quarter, and Class Y shares returned 6.76%, while the Fund s benchmarks, the Bank of America Merrill Lynch (BofA ML) High Yield Master II Index and the BofA ML All Convertibles Speculative Quality Index, returned 4.90% and 6.93%, respectively. The Fund underperformed during a quarter which featured heightened market volatility, as the portfolio s exposures to common equities and convertible securities detracted from relative returns. We believe the recent volatility within the U.S. high-yield market has served to increase the attractiveness of the asset class. Our positive fundamental outlook is supported by the fact that corporate issuers have generally maintained solid profit margins and healthy balance sheets. In addition, financial conditions remain positive, as issuers continue to have access to capital. The third quarter of 2015 saw increased volatility in the U.S. high-yield market, as the BofA ML High Yield Master II Index returned 4.90%, its worst quarterly performance since the third quarter of High-yield s underperformance occurred within the context of heightened capital market volatility driven by concerns about global economic growth and uncertainty about U.S. monetary policy. In that environment, equity markets also underperformed significantly, with U.S. large-cap stocks, as measured by the Standard & Poor s 500 Index, returning 6.43%, and small caps, as measured by the Russell 2000 Index, faring even worse ( 11.92% return for the three-month period). Convertible bonds declined along with U.S. equities, returning 6.93% for the quarter as measured by the Fund s other benchmark, the BofA ML All Convertibles Speculative Quality Index. Meanwhile, emerging markets equities plummeted during the third quarter, returning 17.72%. The flight to quality by investors during the quarter benefited U.S. Treasuries, as the 10-year Treasury yield declined by 0.31%, to 2.06% by quarter end. Credit spreads on U.S. investment-grade corporate bonds increased by 24 basis points (bps) during the quarter, to 169 bps. The asset class returned 0.83% over the three-month period, but underperformed like-maturity Treasuries on an excess-return basis. (Credit spreads are commonly defined as the differences in yield between Treasuries and other types of fixedincome investments with similar maturities; a basis point is equal to 0.01%; excess returns represent the return generated by a risky investment, such as high-yield bonds, compared with the return of investments perceived by the market to be risk-free, such as Treasuries.) The weakness in commodities continued during the three-month period, as the West Texas Intermediate crude oil price declined by 24%, ending the quarter at $45.09 per barrel. The BofA ML High Yield Master II Index (the BofA ML Index) produced negative returns in each month of the quarter, as the market volatility was broad-based across industry sectors. The continued decline in energy and base metal prices drove underperformance in the energy ( 16.1%), metals/mining ( 14.1%) and steel ( 11.1%) sectors. Telecom and cable/satellite were other sectors that notably underperformed in the third quarter. These sectors make up a combined 14.6% of the overall BofA ML Index. Telecom returned 5.4%, as the sector was hurt by Moody s downgrading the credit ratings of both Sprint and Windstream. In addition, Frontier Communications launched a massive $6.6 billion new bond deal, which weighed on the sector from a technical standpoint. Similarly, the cable/satellite industry, which returned 3.64%, was negatively impacted by increased bond supply following a $4.8 billion deal from Dutch media giant Altice to fund its $10 billion acquisition of New York-based Cablevision, another high-yield issuer. The banking sector was a rare outperformer within high yield this quarter, returning 0.76%. The sector has benefited from continued strength in the U.S. economy. Food/beverage/tobacco, which returned 0.55%, was also positive this quarter. Lower commodity input costs and the sector s overall defensive nature were the main drivers of the solid results. From a quality perspective, lower-credit-quality bonds underperformed in the third quarter, with CCCs ( 8.36%) lagging both single-b s ( 5.66%) and BB s ( 3.16%).

2 The supply/demand backdrop within high yield was challenging in the third quarter, as there was $41 billion of new issuance, which included several large transactions. Meanwhile, high-yield mutual funds and exchange-traded funds experienced $10.9 billion worth of outflows. The high-yield market s average option-adjusted spread (OAS) widened by 145 bps this quarter, to 654 bps, and the average yield-toworst increased by 1.34%, to 7.99% (the yield-to-worst represents the lowest potential yield that can be received on a bond without the issuer actually defaulting on its debt). Finally, the average price in the BofA ML Index declined by $5.98 this quarter, to $92.23 as of September 30, Despite the market volatility in the third quarter, we believe the fundamental backdrop is still favorable, as high-yield default levels remain well below the 4% long-term average; the Moody s 12-month trailing issuer-based default rate stood at 2.3% at quarter end. Sector Allocation and Security Selection The Fund underperformed during a quarter which featured heightened market volatility, as the portfolio s exposures to common equities and convertible securities detracted from relative returns. Security selection results were mixed for the Fund this quarter. Meanwhile, the portfolio s exposure to non-benchmark sectors such as senior secured bank loans, event-linked bonds and residential mortgage-backed securities (RMBS) contributed to the Fund s relative performance. Security selection within the energy sector detracted from the Fund s benchmark-relative returns. The portfolio s positioning in exploration-and-production issuers such as Linn Energy, Penn Virginia and Halcon Resources hurt performance. Meanwhile, the Fund s underweight to and positive security selection results within the basic industries sector aided relative returns. The Fund also benefited from its underweight to coal issuers and an overweight to home builders such as Lennar, KB Home and Standard Pacific. Home builders, in general, have fared quite well of late due to strong demand and low housing supply. The portfolio s exposure to convertible bonds detracted from the Fund s relative results in the third quarter. Within convertibles, the Fund s allocation to health care hurt performance as the sector sold off in the third quarter due to profit taking and pricing concerns. Within health care, the Fund s holdings in pharmaceuticals were especially weak this quarter, as the industry came under fire from presidential primary campaign rhetoric related to aggressive pricing strategies. We believe that is largely a headline risk, however, and that the pharmaceutical industry will continue to benefit from positive secular demographic trends. During the third quarter, the Fund s positions in biopharmaceutical issuers Theravance, Emergent Biosolutions and Biomarin Pharmaceutical all detracted from benchmark-relative performance. Finally, the Fund s 3% average allocation to common stocks also detracted from benchmark-relative results this quarter, given the equity market s volatility, especially among small- and mid-cap stocks. However, we think the Fund s performance should benefit from its exposure to equities over the longer term, given what we believe to be attractive relative valuations and a positive outlook for U.S. economic growth. Among the portfolio s equity holdings, allocations to the energy, health care and industrials sectors underperformed and hurt benchmark-relative returns. Fund Positioning The Fund s portfolio continues to be well diversified* across industry sectors. Energy is the largest absolute exposure as of quarter end, at 12.2% of invested assets, but that still represents a modest underweight compared with the BofA ML Index. We believe the sector offers attractive relative valuations; however, volatility will likely persist due to the uncertain outlook for oil prices. Our focus is on purchasing securities of what we believe to be higher-quality exploration-and-production issuers that we feel are best positioned for the current oil and gas pricing environment. Meanwhile, the Fund is underweight oil field service issuers due to those companies high sensitivity to oil prices. Health care represents an 11.9% weighting in the Fund s portfolio as of quarter end, which is overweight by 2.5% relative to the BofA ML Index. With the aging baby boomer population, we believe the sector has a favorable demographic backdrop. We view the Affordable Care Act as an additional positive factor for the sector. Within health care, the portfolio owns securities from a mix of issuers, including for-profit hospitals such as HCA and Community Health Systems (CHS). The Fund also has exposure to equitylinked securities within the biotech segment of the market, due to the industry s favorable growth outlook. The Fund remains underweight to the telecommunications and retail sectors as of quarter end: telecommunications has a weak fundamental outlook; and the retail industry, historically, has a high default rate. *Diversification does not assure a profit nor protect against loss.

3 We continue to maintain non-benchmark allocations to convertibles (14.5%) and common equities (3.0%) in the Fund s portfolio, because of what appear to be attractive relative valuations. Equity-related exposures include companies in the health care, technology and banking sectors. Finally, for additional yield and diversification opportunities, the Fund has small allocations to event-linked (4.7%) and securitized (2.1%) assets. High Yield Market Outlook We continue to expect solid gross domestic product (GDP) growth of 2.7% to 3.0% over the next year in the U.S., led by consumption, improved government spending, and the housing sector. Employment continues to be strong and the labor market is nearing what is considered to be full employment at which point, wage inflation may increase. While investors may see a short-term flight to quality in the future with spread sectors suffering some outflows we believe that the effects on the broader market will be transitory and that supportive global monetary policies and, in the U.S. in particular, improving economic fundamentals will drive market performance. (Spread sectors represent non-governmental fixed-income investments with higher yields at greater risk than governmental investments.) We believe the recent volatility within the U.S. high-yield market has served to increase the attractiveness of the asset class. As noted earlier, the high-yield market s average OAS widened to 654 bps in the third quarter, solidly higher than the long-term average of 550 bps. We believe current spread levels more than compensate investors for default risk, and we think the high-yield default rate will remain below its 4% long-term average through at least Our positive fundamental outlook is supported by the fact that corporate issuers have generally maintained solid profit margins and healthy balance sheets. In addition, financial conditions remain positive, as issuers continue to have access to capital. A notable risk going forward is increased market volatility as the U.S. Federal Reserve eventually begins to increase short-term interest rates. However, we believe high-yield spreads should be able to comfortably absorb the effects of rising Treasury yields. The outlook for oil prices will also be an important factor going forward, given the weighting of the energy sector within the BofA ML Index. However, we believe energy credit spread levels more than compensate investors for the current risk factors within the sector. Finally, the market has experienced an increase in merger-and-acquisition activity, which is driving heightened supplies of new bond issues in select industries. Importantly, the high levels of leveraged buyout (LBO) activity that characterized the 2005 through 2007 period is not currently present, which is a positive factor.

4 Performance Review Pioneer High Yield Fund s Class A shares returned 6.84% at net asset value in the third quarter, and Class Y shares returned 6.76%, while the Fund s benchmarks, the Bank of America Merrill Lynch (BofA ML) High Yield Master II Index and the BofA ML All Convertibles Speculative Quality Index, returned, returned 4.90% and 6.93%, respectively. Average Annual Total Return (Class A shares) September 30, 2015 (at NAV) (at POP) BofA ML High Yield Master II Index BofA ML All Convertibles Speculative Quality Index 1 year 5.54% 9.80% 3.57% 8.50% 3 years 3.69% 2.12% 3.46% 7.41% 5 years 5.82% 4.85% 5.94% 7.30% 10 years 5.71% 5.22% 7.11% 6.43% Average Annual Total Return (Class Y shares) September 30, 2015 (at NAV) BofA ML High Yield Master II Index BofA ML All Convertibles Speculative Quality Index 1 year 5.26% 3.57% 8.50% 3 years 4.04% 3.46% 7.41% 5 years 6.17% 5.94% 7.30% 10 years 6.15% 7.11% 6.43% Expense Ratios (As of prospectus dated March 1, 2015) Class A shares: Gross, 1.15% Class Y shares: Gross, 0.84% Call or visit us.pioneerinvestments.com for the most recent month-end performance results. Current performance may be lower or higher than the performance data quoted. The performance data quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. NAV results represent the percent change in net asset value per share. Returns would have been lower had sales charges been reflected. POP returns reflect deduction of the maximum 4.50% sales charge at the beginning of the period. All results are historical and assume the reinvestment of dividends and capital gains. Other share classes are available for which performance expenses will differ. Class Y shares are not subject to sales charges and are available for limited groups of eligible investors, including institutional investors. Performance results reflect any applicable expense waivers in effect during the periods shown. Without such waivers Fund performance would be lower. Waivers may not be in effect for all funds. Certain fee waivers are contractual through a specified period. Otherwise, fee waivers can be rescinded at any time. See the prospectus for more information.

5 A Word about Risk: Investments in high-yield or lower-rated securities are subject to greater-than-average price volatility, illiquidity and possibility of default. When interest rates rise, the prices of fixed-income securities in the Fund will generally fall. Conversely, when interest rates fall, the prices of fixed-income securities in the Fund will generally rise. Investments in the Fund are subject to possible loss due to the financial failure of issuers of underlying securities and their inability to meet their debt obligations. Prepayment risk is the chance that an issuer may exercise its right to prepay its security, if falling interest rates prompt the issuer to do so. Forced to reinvest the unanticipated proceeds at lower interest rates, the Fund would experience a decline in income and lose the opportunity for additional price appreciation. The portfolio may invest in mortgage-backed securities, which during times of fluctuating interest rates may increase or decrease more than other fixed-income securities. Mortgage-backed securities are also subject to pre-payments. The Fund may use derivatives, such as options, futures, inverse floating rate obligations, swaps, and others, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Derivatives may have a leveraging effect on the Fund. At times, the Fund's investments may represent industries or industry sectors that are interrelated or have common risks, making it more susceptible to any economic, political, or regulatory developments or other risks affecting those industries and sectors. These risks may increase share price volatility. The Bank of America Merrill Lynch High Yield Master II Index is an unmanaged, commonly accepted measure of the performance of high-yield securities. The Bank of America Merrill Lynch All-Convertibles Speculative Quality Index is an unmanaged index of high-yield U.S. convertible securities. Index returns are calculated monthly, assume reinvestment of dividends and, unlike mutual fund returns, do not reflect any fees or expenses associated with a mutual fund. It is not possible to invest directly in an index. The views expressed in this commentary are those of the portfolio manager and are subject to change at any time. These views do not necessarily reflect the views of Pioneer or others in the Pioneer organization and should not be relied upon as investment advice, as securities recommendations, or as an indication of trading intent on behalf of any Pioneer investment product.

6 Securities Discussed Top 10 Holdings % of Portfolio as of September 30, 2015 Linn Energy, 6.25%, 11/1/ % Penn Virginia, 8.50%, 5/1/ % Halcon Resources, 8.875%, 5/15/ % Lennar, 4.75%, 11/15/ % KB Home, 1.375%, 2/1/ % Standard Pacific, 6.25%, 5/15/ % Theravance, 2.125%, 1/15/ % Emergent Biosolutions, 2.875%, 1/15/21 Biomarin Pharmaceutical, 1.50%, 10/15/ % 0.21% HCA, 5.375%, 5/1/ % CHS, 8.00%, 11/15/ % % of Portfolio as of September 30, Sprint, 7.25%, 9/15/ % 2. Crown Cork & Seal, 7.375%, 12/15/ % 3. HCA, 5.375%, 2/1/ % 4. Sealy, 8.00%, 7/15/16 (PIK) 1.03% 5. CHS, 8.00%, 11/15/ % 6. Scientific Games International,10.00%, 12/1/ % 7. Cincinnati Bell, 8.375%, 10/15/ % 8. Ford Motor 0.78% 9. CCO Holdings, 6.50%, 4/30/ % 10. Frontier Communications, 8.50%, 4/15/ % The portfolio is actively managed, and current holdings may be different. The holdings listed should not be considered recommendations to buy or sell any security listed. Before investing, consider the Fund s investment objectives, risks, charges and expenses. Contact your advisor or Pioneer Investments for a prospectus or summary prospectus containing this information. Read it carefully. Neither Pioneer, nor its representatives are legal or tax advisors. In addition, Pioneer does not provide advice or recommendations. The investments you choose should correspond to your needs, goals, and risk tolerance. For assistance in determining your financial situation, please consult an investment professional.

7 Not FDIC insured May lose value No bank guarantee Securities offered through Pioneer Funds Distributor, Inc., 60 State Street, Boston, MA Underwriter of Pioneer mutual funds, Member SIPC 2015 Pioneer Investments us.pioneerinvestments.com