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High-Yield Rally to Stay Course, Manager Says

High-yield bonds will outperform other fixed-income categories as the economy improves, says Andrew Feltus, manager of the Pioneer High-Yield Fund .

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The $3.2 billion mutual fund, which garners two of five stars from Morningstar, has returned 17% over the past year, better than 98% of its peers. During the past decade, the Pioneer High-Yield Fund has risen an average of 9% annually, putting it in Morningstar's eighth percentile for high-yield bond funds.

Welcome to TheStreet's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

TheStreet: High yield has been a very good place to be over the past year. Do you expect that to continue?

Feltus: It's all relative so it depends on what you are comparing it to. That said, spreads are still attractive, and, given the very strong fundamentals, they should continue to contract. That means high yield will continue to outperform most other fixed-income sectors.

TS: And what do you think will happen to high yield once the Fed's QE2 program ends this summer?

Feltus: That's a good question. It's tough to predict. However, my expectation is that the economy will transition from being driven by government stimulus to being driven by the private sector. The big question is how the economy reacts to a tightening.

If they tighten too hard, that would put pressure on the economy and lead to a QE3. If they do it right, the private sector will take us forward, although you won't see the returns we have enjoyed over the past two years.

TS: High yield has been especially strong because other securities pay so little. What does the supply side look like right now?

Feltus: Supply has been very disciplined so far. It's mainly being driven by refinancing so you are not increasing the debt in companies, but rolling it over instead. However, the longer the cycle goes on, the more likely it is that you will see deterioration. Even now we are starting to see covenants get a little worse and deals getting a little sketchier. I am not scared at this point, but it's something we pay close attention to.

TS: Why do you like Wesco bonds?

Feltus: They provide electrical components, so you are starting to see increased demand for their products lifting both their top and bottom lines. We expect to see continued growth as far as their earnings. And Wesco has proven that it is a company that can survive in both good and bad times.

TS: Why do you prefer Tesoro bonds instead of the refiner's stock?

Feltus: Just like Wesco, Tesoro is a company that can survive a downturn as well as prosper during an upturn. Predicting energy demand and the length of the economic cycle, however, is a much more difficult job. So I would rather buy the bonds and clip the coupons than attempt to trade a very unpredictable stock.

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