We are pleased to report to our stockholders on the results of The New America High Income Fund, Inc. (the "Fund") for the year ended December 31, 2020. The Fund's net asset value (the "NAV") was $9.79 as of December 31st. The market price for the Fund's shares ended the period at $8.68, representing a market price discount of approximately 11%. During the period, the Fund paid dividends totaling $0.6525 per share, which included a special dividend of $0.0925 per share. The dividend yield for a share of common stock purchased at the market price of $9.13 on December 31, 2019 was 7.15%. The dividend yield based upon the December 31, 2019 NAV of $10.02 was 6.51%. 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 $84 million through its credit facility with the Bank of Nova Scotia (the "Facility"), representing an increase of $6 million from the level of borrowings on June 30th. During 2020, the amount borrowed through the Facility ranged from $78 million to $91 million, depending upon the investment adviser's assessment of high yield market investment opportunities. At year-end, borrowings accounted for approximately 27% of the Fund's total assets. Amounts borrowed under the Facility bear interest at an adjustable rate based on a margin above the London Interbank Offered Rate ("LIBOR"). The rate the Fund paid on the Facility decreased significantly during the year, as LIBOR fell following the Federal Reserve's adoption of a near-zero Fed Funds interest rate policy. The interest rate on the Facility at the end of the period was 1.00%. The average rate on the Facility in 2020 was 1.53%, down from an average rate of 3.15% in 2019.
For the first time in several years, the spread between the interest rate the Fund paid on leverage (i.e., borrowings) and the market value-weighted average current yield earned on the portfolio rose. At the end of 2019, the Fund was paying 2.65% in interest on borrowings and earning a market-value weighted current yield of 6.53% for a yield spread of 3.88%. Whereas, at the end of 2020, the Fund was paying just 1.00% interest on leverage, while the portfolio's market value-weighted current yield was 6.27%, widening the yield spread to 5.27%. A larger yield spread resulted in an increase in the contribution of leverage to the Fund's net income of approximately 21.2% in 2020, up from 15.2% in 2019.
We remind our stockholders 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 stockholders than the same portfolio would produce without leverage. Leverage also magnifies the effects of price movements on the Fund's NAV per share. For the year ended December 31, 2020, in which the high yield bond market turned in a positive performance, leverage increased the Fund's total return. Of course, in an unfavorable market, leverage would decrease the Fund's total return.
||Total Returns for the Periods Ending
December 31, 2020
||3 Years Cumulative
|New America High Income Fund, Inc.
(Stock Price and Dividends)*
|New America High Income Fund, Inc.
(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 Fund'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.
Commentary by T. Rowe Price Associates, Inc.
The high yield market returned 5.48% for the twelve months ended December 31, 2020, according to the Credit Suisse High Yield Index (the "Index"). The coronavirus has had a meaningful impact on global financial markets since its emergence in the first quarter of 2020. Reports of the coronavirus in China periodically unsettled markets throughout January and early February, but the virus later took on global pandemic status with unparalleled economic impacts to world economies and completely derailed all risk assets, including high yield bonds. The sheer velocity and severity of market declines was unprecedented, particularly through mid-March. October 2008 is the only month in which the high yield market posted losses greater than those experienced in March 2020.
Investors welcomed efforts by the U.S. Federal Reserve (the "Fed") and the federal government to support the U.S. economy. The Fed decided in mid-June 2020 to augment the $2.3 trillion lending facility established in April to purchase bond ETF shares by starting to buy a broad portfolio of U.S. corporate bonds. In August, the central bank revealed that it would allow inflation to drift above its 2% target as part of an "inflation averaging" program designed to boost the labor market. As the economy recovers, this should allow the Fed to keep rates at the current near-zero level for a longer period without increases to preempt higher inflation.
Positive developments in the fight against the coronavirus and the removal of political uncertainty in the U.S. following the November elections appeared to be the primary drivers of gains during the fourth quarter of 2020. The regulatory approval and distribution of vaccines in December 2020 seemed to provide a tailwind to financial markets as the year came to an end. The toll of the pandemic worsened considerably, however, weighing on consumer sentiment and seeming to limit the market's gains.
Technical conditions in the high yield bond market were positive during the last three quarters of 2020 after primary markets came to a complete standstill in March. The high yield asset class experienced a record annual inflow of $43.6 billion and received additional support from multi-sector, investment grade and equity investors, which helped offset robust new issuance. Specifically, the volume of gross and refinancing issuance in 2020 reached all-time highs of $449.9 billion and $297.2 billion, respectively, allowing companies to initially secure liquidity and later extend maturities and reduce financing costs.
Yield spreads of the Index compared to U.S. Treasuries had widened by over 1,000 basis points from the end of 2019, when they peaked on March 23rd at 1,417 basis points. Index spreads at the end of 2020 were 431 basis points, only 15 basis points wider than at the end of 2019, with a yield-to-worst of 4.59% - the lowest yield on record. These levels compare with the long-term averages of approximately 607 basis points and 8.70%, respectively. The J.P. Morgan par-weighted default rate tracked higher throughout 2020, ending the period at 6.17% - up from 2.63% at the end of 2019. For the last twelve months, the energy sector accounted for 35% of default volume, affecting $49.1 billion of outstanding debt.
We continued to cautiously shift toward more cyclical industries as we became more positive on the effectiveness of therapeutic coronavirus treatments, the development of a vaccine, and eventually broad public inoculation in the medium term. Consistent with our management style of limiting risk by following a disciplined and rigorous fundamental investment process focused on identifying improving credits and solid risk-adjusted return opportunities, the portfolio outperformed the Index during the volatility in the first quarter of 2020. However, the portfolio underperformed the Index in the second half of the year when risk was indiscriminately rewarded — as evidenced by the CCC rating tier's strong outperformance during the third and fourth quarters. At the end of 2019, the portfolio was significantly underweight relative to the Index in cyclically challenged corners of the market, such as the transportation, retail, publishing and automotive industries. The defensive positioning served us well amid the emergence of the coronavirus pandemic because the most cyclical industries bore the brunt of the lockdown's impact.
Security selection in the metals and mining industry was a top contributor to relative performance, partly due to Freeport-McMoRan, the second-largest copper producer by volume globally. The company is expected to see a significant ramp up in production, EBITDA, and free cash flow in 2021 following the conversion of the Grasberg mine in Indonesia from an open-pit to an underground mine, which should drive deleveraging and could potentially result in a ratings upgrade.
Credit selection and our overweight allocation among cable operators - which is generally considered a defensive market segment due to issuers' subscription-based, recurring-revenue business models - contributed to relative performance. The security selection impact was partly due to Netflix, the world's largest internet entertainment service. Netflix is one of the rare companies that benefited cyclically from the lockdown, as its subscriber base increased dramatically, essentially pulling forward future subscriptions.
Security selection in the financials segment also benefited relative performance. Positioning the portfolio to benefit from the continued consolidation among insurance brokers has been one of our larger secular bets. We hold meaningful positions in some of the industry's CCC rated discounted names and were rewarded as the bonds traded higher. Additionally, Navient, a lender that originates, maintains, and services a portfolio of student loans also supported relative performance. The company has a high quality portfolio, as a significant portion is composed of federally guaranteed loans, where Navient bears minimal credit risk.
Credit selection in the entertainment and leisure space weighed on relative results, partly due to AMC Entertainment, the world's largest movie theater chain. The company was overleveraged, and the pandemic significantly disrupted its operations due to the mandated shutdown of crowded public venues, including movie theaters. While the portfolio was underweighted in the entertainment and leisure segment versus the benchmark at the time, our higher relative weight in AMC was a drag on performance.
Security selection in the services segment detracted from performance, partly due to car rental agency Hertz. The coronavirus pandemic severely hampered the company's business as demand for its vehicles significantly declined due to travel restrictions. We fully exited our positions before Hertz sought bankruptcy protection in May 2020.
The portfolio's underweight to the building & real estate segment weighed on relative results largely due to our avoidance of lower quality and emerging market issuers, such as the Chinese property developer Evergrande, that rallied from stressed price levels during the second half of the year.
During 2020, many companies that we thought might not survive the global health crisis secured funding by issuing new debt. In our view, the increased debt load of some of these issuers increases the likelihood of residual defaults in the coming years, as some of the more levered companies may not be able to generate the EBITDA and free cash flow required to grow into their new capital structures. However, we continue to see several positive trends for the high yield asset class, including strong technical support, improving fundamentals and average credit quality. We anticipate that the high yield bond market's overall default rate will moderate in 2021.
At the beginning of 2020, high yield market participants were generally underinvested. Robust positive flows to the asset class during the year have provided technical support, buoyed secondary market prices, and created strong interest in new issues. As high yield spreads continue to compress toward pre-crisis levels, we are still finding value in corners of the market where companies can benefit from a more permanent reopening of the economy or from therapeutic coronavirus treatments and broad public inoculation.
Although the pace of high yield inflows has recently decelerated, a fair amount of cash remains on the sidelines and, in our view, high yield is one of the few fixed income market segments where investors can turn for meaningful income. We believe this dynamic could continue to drive strong demand for high yield bonds and further tightening of yield spreads over the next several months.
As always, we aim to deliver high current income while seeking to contain the 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.
|Ellen E. Terry
The New America High Income Fund, Inc.
|Rodney M. Rayburn
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.