We are pleased to report to our shareholders on the results of The New America High Income Fund (the "Fund") for the six months ended June 30, 2017. The Fund's net asset value (the "NAV") was $10.27 as of June 30th. The market price for the Fund's shares ended the period at $9.48, representing a market price discount of 7.7%. During the six-month period ended June 30, 2017, the Fund paid regular dividends of $.06 per share in each month other than January, in addition to a special dividend of $.0975 per share. Annualizing the regular monthly dividend of $.06 per share on a share of common stock purchased at the year-end 2016 price of $9.26 would result in a dividend yield of 7.8%.
As of June 30th, the Fund had $91 million of borrowing through its credit facility (the "Facility") with the Bank of Nova Scotia, unchanged from borrowings at year-end. Amounts borrowed under the Facility bear interest at an adjustable rate based on a margin above LIBOR. The interest rate on the Facility at the end of the period was 2.13%, an attractive spread relative to the 6.79% market value-weighted average current yield on the Fund's portfolio on June 30th. The spread between the rate the Fund is paying on the borrowing and the market value-weighted average current yield on the portfolio has narrowed. One year ago, the Fund was paying 1.35% on its borrowings compared with the market value-weighted average current yield on the portfolio of 7.18%, for a spread of 5.83 percentage points. At the end of the current period, the spread had narrowed to 4.66 percentage points. The Fund's leverage contributed to approximately 21% of the net income earned in the first half of 2017, compared to 25% of the net income in the first half of 2016.
Bond market investors continue to follow closely the Federal Reserve's (the "Fed") statements regarding the timing and magnitude of increases in interest rates. Following two increases in the federal funds rate this year, short term interest rates such as LIBOR have increased, although rates on new issue high yield bonds have not. As more fully discussed below by the Fund's investment advisor, high yield bond valuations remain high and yields are below historical levels.
We remind 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, the extent to which the portfolio is fully invested and operating expenses, among other factors. Leverage magnifies the effect of price movements on the net asset value. The Fund's leverage has increased the Fund's total return in the recent period of positive high yield market performance. Of course the opposite would be true in an unfavorable high yield market.
Interest rate risk is one of the risks faced by the Fund's shareholders. However, bonds of different quality and varying maturities react differently to changing rates. Duration is a measure of the sensitivity of a bond's price to a change in rates. Duration takes into account a bond's maturity and coupon. A relatively short maturity shortens duration as does a relatively high coupon. A short bond duration indicates less price sensitivity to changes in interest rates. High yield bonds have relatively lower durations compared to investment grade bonds, resulting in less price volatility in changing rate environments, although high yield bonds are more sensitive to credit risk than investment grade bonds, resulting in greater price volatility in changing economic conditions. It is also noteworthy that a change in Fed policy to higher interest rates indicates confidence in the strength of the U.S. economy. In general, a stable to improving economy is beneficial to high yield companies.
||Total Returns for the Periods Ending
June 30, 2017
||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 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 net asset value or market value with all distributions reinvested. Distributions are assumed to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Because the Fund's shares may trade at either a discount or premium to the Fund's net asset value per share, returns based upon the stock price and dividends will tend to differ from those derived from the underlying change in net asset value and dividends.
Commentary by T. Rowe Price Associates, Inc.
High yield bonds posted positive results in the first six months of the calendar year despite political tensions and oil price volatility that at times weighed on the market. The continuation of the Trump-enthusiasm trade was evident as the year began. However, the administration faced opposition to several policy changes from both sides of the aisle. The Fed announced two 25-basis-point increases in the federal funds target rate range during the first half of the year, with the first in March and the second in June. Fed officials maintained their outlook for one more rate hike in 2017 and also outlined their plans to begin unwinding the central bank's $4.5 trillion balance sheet, a legacy of its massive purchases of Treasury bonds and mortgage-backed securities in the aftermath of the 2008 financial crisis. Despite the moves by the central bank, longer-term Treasury interest rates declined over the last six months-thus flattening the yield curve-as inflation remained low, economic growth was lackluster, and new fiscal stimulus measures failed to materialize.
Trading in bonds of energy and commodity-related industries was volatile throughout the period as the market absorbed sometimes-conflicting reports about levels of oil inventories. Disappointment that OPEC did not deepen its production cuts as part of the agreement to curtail output for an additional nine months also contributed to energy sector weakness. In the second quarter, CCC-rated bonds underperformed higher qualities for the first quarter since March of 2016. Based on the Credit Suisse High Yield Index (the "Index"), spreads tightened by 44 basis points over the first six months to end the period at 428 basis points. This compares to the historical monthly average of 580 basis points, going back more than 30 years.
Year-to-date high yield issuance has increased compared with the first six months of 2016. However, the majority of new issue volume has been used to refinance existing debt, decreasing companies' cost of capital and extending maturities. Mutual fund flows into the high yield bond market have been negative for the first half of the year. Default activity decreased quarter-over-quarter and is significantly lower than 3.6% at year-end 2016. The J.P. Morgan par-weighted default rate ended June at 1.5%. The steep decline year-to-date is due to $34.8 billion of debt-largely confined to commodity-related sectors-rolling off the first six months of 2016 compared with only $9.5 billion of debt rolling off during the 12-month period ended June 30, 2017.
Credits within the larger media and telecom sectors have represented top issuer positions in the portfolio for several years and have continued to generate steady returns through the first half of the calendar year. The Fund's positioning within the media/telecom sector-credit selection and an overweight allocation-was the top contributor for the six month period. The investment team remains constructive on cable operators due to the subscription based nature of the business, attractive margins, stable cash flow and moderate growth prospects. Within the context of the overall high yield market, relative value of the industry on a risk-adjusted basis remains attractive as we expect most operators to exhibit stable credit profiles over the intermediate-term.
In June crude oil entered a bear market, generally defined as a decline of over 20% from recent highs, before recovering some losses near the end of the month. Non-OPEC oil productivity continues to ramp up, largely driven by rising North American oil production. The production cost curve is declining rapidly because of new shale technology in the U.S. These factors have renewed the thesis at T. Rowe Price that oil prices could decline further based on oversupply. Within the energy industry, we have reduced risk this year. The investment team trimmed names in the oil services and offshore driller segments and low quality exploration and production ("E&P") credits that are more susceptible to lower commodity prices. Proceeds were redeployed into higher quality BB-rated E&Ps and midstream issuers. BB-rated E&Ps are trading at attractive yield spreads compared to their 3-, 5- and 10-year averages relative to the high yield market excluding energy.
Credit selection within the food industry was the top detractor from the portfolio's performance, driven by Agrokor, a Croatian retailer that produces, distributes and sells food products throughout the Balkans. Speculation of a capital injection from a Russian bank and Croatian government involvement in the company plagued the credit throughout the first quarter. Pricewaterhouse Coopers was appointed to audit Agrokor's financial statements due to concerns that there were errors in prior financial reports. The Fund's modest position was eliminated at a loss during the period.
The investment team has modestly upgraded the portfolio by rotating out of lower quality bonds into BB and B- rated securities. Moreover, the majority of the Fund's CCC-rated bonds are more conservatively positioned, evidenced by the lower yield on the portfolio's CCC-rated issues relative to the Index. We believe that many of the Fund's lower quality bonds are mis-rated by the rating agencies and "single B-rated bonds in disguise" poised for credit improvements.
High yield bond valuations appear rich based on current spread and yield levels relative to historical averages as reflected in today's elevated bond prices. Returns in segments that led 2016 market performance-commodity-related industries and lower quality bonds-subsided towards the end of the period, and we saw broader gains across multiple sectors. Moreover, high yield bond and stock market results have been strong in the aftermath of the U.S. elections last November. Enthusiasm tied to the new administration has been clearly priced into asset prices, despite there being relatively little progress toward fiscal stimulus and difficulty implementing other campaign platform policies. Beyond the U.S., global elections throughout this year and central bank policy changes also bring a considerable level of uncertainty. Economic and credit cycles-already extended-could stretch further.
High yield bonds are well positioned from a yield and duration perspective relative to many alternative fixed income sectors. A relatively low duration profile and higher income of the asset class are attractive in this environment. Steady economic growth and favorable U.S. employment trends are supportive to high yield issuers, which are typically more sensitive to macroeconomic factors. Solid corporate fundamentals based on strong earnings and ready access to capital mean that the default rate may remain low. While our credit analysts struggle to find value across the high yield market, idiosyncratic opportunities do exist, particularly related to M&A developments or amid pockets of market volatility.
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.