The annual report for The New America High Income Fund (the "Fund") for the year ended December 31, 2018 contains important information about the Fund's portfolio investments, the Fund's performance and the investment adviser's market outlook. The Fund's net asset value (the "NAV") was $8.90 as of December 31st. The market price for the Fund's shares ended the period at $7.56, representing a market price discount of approximately 15%. High yield bond market investors experienced a challenging market environment in 2018. The market price discount to the NAV per share of the Fund and its competitor funds widened markedly during the year. The widening discount in the Fund's stock price to its NAV per share resulted in the Fund's 2018 total return based on the Fund's stock price to be significantly lower than the total return based upon the Fund's NAV per share. During the period, the Fund paid dividends totaling $0.696 per share, including a special dividend of $0.083 per share. The dividend yield for a share of common stock purchased on December 31, 2017 at the market price of $9.40 was 7.40%. The dividend yield based upon the December 31, 2017 NAV of $10.19 was 6.83%. The Fund's investment adviser discusses the market environment and its market outlook in detail below.
As of December 31st, the Fund had outstanding borrowings of $91 million through its credit facility (the "Facility") with the Bank of Nova Scotia. The borrowings represented approximately 30% of the Fund's total assets. Amounts borrowed under the Facility bear interest at an adjustable rate based on a margin above LIBOR. The rate the Fund paid on the Facility increased throughout 2018, as LIBOR rose following four increases in the Federal Funds rate. The interest rate on the Facility at the end of the period was 3.31%. The average rate on the Facility in 2018 was 2.91%, compared with an average rate of 2.00% in 2017.
For the fourth consecutive year, the spread between the interest rate the Fund paid on leverage (i.e., borrowings) and the market value-weighted average current yield earned on its portfolio declined. At year-end 2017, the Fund was paying 2.27% in interest on borrowings and earning a market value-weighted current yield of 6.67% on its portfolio, for a spread of 4.40 percentage points. At the end of 2018, the Fund was paying 3.31% in interest on leverage, compared with the portfolio's market value-weighted current yield of 7.36%, narrowing the spread to 4.05 percentage points. While leverage remains a contributor to the Fund's common stock dividend, it contributes less than it has in past years. The Fund's leverage contributed to approximately 16.7% of the Fund's net income earned in 2018, compared to 20% of net income in 2017 and 23% of net income in 2016.
We remind our shareholders that there is no certainty that the dividend will remain at the current level. The dividend can be affected by portfolio results, the cost and amount of leverage, market conditions, how fully invested the portfolio is and operating expenses, among other factors.
As noted above, the Fund's leverage produces a higher dividend for shareholders than the same portfolio would if the Fund did not have a leveraged structure. Leverage also magnifies the effect of price movements on the Fund's NAV per share. In 2018's declining high yield market, the Fund's NAV per share fell more than it would have if the Fund did not have a leveraged structure. In a favorable high yield bond market, leverage increases the Fund's total return.
||Total Returns for the Periods Ending
December 31, 2018
||3 Years Cumulative
|New America High Income Fund
(Stock Price and Dividends)*
|New America High Income Fund
(NAV and Dividends)*
|Credit Suisse High Yield Index
Sources: Credit Suisse and The New America High Income Fund, Inc.
Past performance is no guarantee of future results. Total return assumes the reinvestment of dividends.
The Credit Suisse High Yield Index (the "Index") is an unmanaged index. Unlike the Fund, the index has no trading activity, expenses or leverage.
* Returns are historical and are calculated by determining the percentage change in NAV or market value with all distributions reinvested. Distributions are assumed to be reinvested at prices obtained under the Fun's dividend reinvestment plan. Because the Fund's shares may trade at either a discount or premium to the Fund's NAV per share, returns based upon the stock price and dividends will tend to differ from those derived from the underlying change in NAV and dividends. The variance between the Fund's total return based on stock price and dividends and the total return based on the Fund's NAV and dividends is due to the widening of the stock price discount to the NAV over the last year.
The Fund's Board of Directors wishes to express its appreciation to former Fund president and director Robert F. Birch, who retired as a director on December 31, 2018, for his many years of distinguished service and contributions to the Fund.
Commentary by T. Rowe Price Associates, Inc.
The high yield bond market declined by 2.37% for the 12-month period ended December 31, 2018, according to the Credit Suisse High Yield Index. Second and third quarter gains gave way to material declines, as a sharp drop in oil prices and equity losses weighed on risk assets over the final quarter of 2018. After starting the year at 2.41%, the yield on U.S. 10-year Treasury Notes climbed to 3.24% by November 8, reflecting solid U.S. economic growth and reduced demand for safe-haven government debt. However, investor sentiment had changed amid equity price declines and growing global macroeconomic concerns. The U.S. Treasury yield curve had partially inverted for the first time since the global financial crisis in 2008, with the yield on a U.S. 2 Year Treasury Note higher than that on a five-year note. As expected, the Federal Reserve (the "Fed") raised interest rates by a quarter percentage point at its December meeting. It was the Fed's fourth quarter-point rate hike in 2018, lifting the federal funds target rate to a range of 2.25% to 2.50%. The central bank's policymaking committee predicted that two rate hikes will be needed in 2019, down from their previous forecast of three increases. Economic data showed significant slowdowns in both China and Europe, and that investors were worried that the sharp drop in oil prices-which declined by over a third during the fourth quarter-was an indicator of underlying weakness in the global economy. Concerns about the deepening U.S.-China trade war also seemed to weigh on global markets throughout the period. In addition, in early December, the Trump administration postponed for 90 days its end-of-year deadline to impose tariffs on Chinese imports.
Through September 30, 2018, the high yield market was up by 2.5% for the year, but October began three months of declines, particularly in December. The fourth quarter was the first time in 2018 that high yield bonds underperformed, lagging behind their investment grade counterparts. The yield spread of the Credit Suisse High Yield Index (the "Index") compared to U.S. Treasuries widened by 181 basis points throughout the course of the year, with over half of the widening occurring in December. Spread widening was particularly intense in European high yield issues due to investor concerns about Brexit and Italian political developments. The year concluded with the Index yield spread at 575 basis points, a level not seen since the recovery from the commodity-related sell-off in early 2016. With underlying interest rates also rising, the Index ended the period with a yield to worst of 8.31%.
Investors withdrew funds from the high yield bond market throughout 2018. Outflows were heaviest in the first and fourth quarters, totaling over $20 billion in each period according to J.P. Morgan. 2018 saw more than $45 billion in retail redemptions. On the supply side, new issue activity declined in 2018 by 43% from the prior year. New high yield issuances in the fourth quarter totaled $19 billion, a 10-year low. For the first time in a decade, there was no new issuance in December, as issuers avoided the market in response to elevated volatility. Issuance shifted to the bank loan market throughout the year as gross new issue high yield activity declined. Moreover, over 60% of high yield volume was used to refinance existing debt, which supports a lower default forecast, but also suggests potential scarcity of new high yield debt if investors decide to add to their allocations.
Default activity was higher in 2018 than in the previous year, largely due to the bankruptcy of iHeartMedia, the largest U.S. radio broadcasting company, which impacted approximately $16 billion of bonds and loans in the first quarter. Most default activity this year was concentrated in the energy and retail sectors.
Although OPEC and Russia announced an agreement to curb output, oil prices fell below $50 per barrel, a 17-month low amid concerns about waning global demand and over-supply. Energy is the largest industry in the high yield market, representing over 15% of the Index. The portfolio's underweight and higher quality credit focus in the energy sector was the top contributor to returns for the six-month period ended December 31, 2018.
Within the metals and minerals sector, New Gold, a low-cost producer, traded lower after experiencing delays on a major project and increasing costs associated with postponements in production. Accordingly, the portfolio's holdings in New Gold were reduced. The portfolio's allocation to European credits was sharply reduced over the period. The region struggled notably amid Brexit uncertainty, Italian political developments and deepening high yield market outflows. While the Fund's investments in European issuers have been reduced, the portfolio continues to maintain a higher exposure to the region than most traditional high yield competitors as we look to take advantage of the full global opportunity set alongside our research capabilities stationed across the globe. The Fund's investment in Kleopatra Lux 1 S.a.r.l ("Kleopatra"), a Germany-based manufacturer of rigid plastic film solutions, was a notable detractor from performance. The bonds traded significantly lower after reporting disappointing third quarter results, as its food division struggled with higher raw material costs and maintaining sale volumes. With Kleopatra's operational turn around delayed, the portfolio's exposure to the company has been reduced.
The credit cycle may have reached the point at which growth, corporate earnings, central bank stimulus, and liquidity have peaked, and global markets may be moving into a less robust or muted macroeconomic environment. Whether policymakers will be able to orchestrate a "soft landing" and sustain the economy's momentum at lower levels of growth while avoiding a recession is a key issue for 2019. There is some uncertainty surrounding the Fed's interest rate strategy for 2019. Given recent volatility, the central bank may attempt to stabilize financial markets by slowing the pace of rate hikes.
Fundamental conditions are supportive of high yield issuers. We believe the default rate in 2019 may remain below the historical average; nevertheless, near-term performance expectations for the high yield asset class remain tempered. Trade disputes with China are creating geopolitical challenges, and corporations could get caught in the crossfire. Market volatility is likely to persist as investors attempt to parse through the implications of supportive fundamentals and macroeconomic conditions that have introduced considerable uncertainty to the market. Even so, valuations appear to be more attractive than they have been in recent years, both on a spread and yield basis.
As always, we aim to deliver high current income while seeking to contain volatility inherent in this market. Our team maintains a commitment to credit research and risk-conscious investing that has led to favorable returns for our high yield clients over various market cycles.
The New America High Income Fund, Inc.
T. Rowe Price Associates, Inc.
Past performance is no guarantee of future results. The views expressed in this update are as of the date of this letter. These views and any portfolio holdings discussed in the update are subject to change at any time based on market or other conditions. The Fund and T. Rowe Price Associates, Inc. disclaim any duty to update these views, which may not be relied upon as investment advice. In addition, references to specific companies' securities should not be regarded as investment recommendations or indicative of the Fund's portfolio as a whole.