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Dear Fellow Shareholders,
The New America High Income Fund's (the "Fund") 2009 total return based on net asset value per share (the "NAV") was an impressive 83.63%, a far cry from the negative total return of -34.74% in 2008. These results should not be viewed in isolation but rather as a combination of the two years in a period of high volatility. For the two year period, the Fund had a combined total return of 21.2%, or a 10.09% average annualized total return.
The portfolio's performance benefited from a combination of the 54% recovery of the market as measured by the Credit Suisse High Yield Index, the low cost leverage deployed by the Fund and the skill of our investment advisor, T. Rowe Price Associates, Inc. The economic turmoil is still evident in all markets. We do not expect a repeat of 2009's gains, however, we do believe that a high yield strategy which is both conservative and opportunistic can continue to be rewarding for our shareholders.
The Fund's leverage, which is in the form of an Auction Term Preferred Stock (the "ATP"), contributed approximately 23% of the common stock dividend in 2009. The Fund's use of leverage is not without risk. Leverage increases the volatility of the Fund's NAV. In improving high yield markets, the leverage increases the NAV, however, in declining markets, the leverage exacerbates the decline in the Fund's NAV.
Performance Update
The Fund's NAV ended the period at $9.44. The market price for the Fund's shares on the New York Stock Exchange closed at $9.05 on December 31, 2009, representing a market price discount of approximately 4.1% from the NAV. The Fund paid dividends totaling $0.904 per share in 2009. Of course in the future, the Fund's common stock dividend may fluctuate, as it has in the past, depending upon portfolio results, the cost and amount of leverage, market conditions and other factors.
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Total Returns for the Period Ending
December 31, 2009 |
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1 Year |
3 Years Cumulative |
New America High Income Fund
(Stock Price and Dividends)* |
126.88% |
12.88% |
New America High Income Fund
(NAV and Dividends) |
83.63% |
21.00% |
| Lipper Closed-End Fund Leveraged High Yield Average |
59.91% |
-13.60% |
| Credit Suisse High Yield Index |
54.22% |
16.87% |
| Citigroup 10 Year Treasury Index |
7.31% |
18.96% |
Sources: Credit Suisse, Citigroup, Lipper, The New America High Income Fund, Inc.
Past performance is no guarantee of future results. Total return assumes the reinvestment of dividends.
*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.
High Yield Market Update
The high yield market ended the year with powerful momentum, capping off the best year ever for the asset class. Even as the economy, by some measures, struggled on the path to recovery and interest rates trended higher, positive investor flows and the pace of new issue volume suggested confidence in the high yield asset class remained intact. New buyers of high yield bonds emerged during the fourth quarter, allowing corporate America to issue more debt securities at attractive long term rates.
The process of refinancing and balance sheet repair that we have witnessed throughout the year has been a key ingredient in the recovery for high yield bonds and should lead to much lower default rates in 2010 than 2009. In December, only one high yield company missed an interest payment. Just a year ago one commonly cited measure, the distressed ratio, (the percentage of the market trading at a yield of 1,000 basis points or more over the reference US Treasury bond yield) peaked at 84%, implying only 16% of the high yield universe was at low risk of insolvency. Today the distressed ratio is closer to 18%, reflecting an unprecedented improvement in the outlook for high yield credits. Prices for high yield bonds have witnessed a similar recovery, with valuations surging throughout the year. While the gains have been dramatic, they are in many cases attributable to the stern actions corporate managements undertook throughout the crisis to right size their businesses for a new economic reality. Many of the credits we evaluate look fundamentally better than they did just a year ago, with lower levels of debt on the balance sheet and ample liquidity. This renewed corporate vigor along with the backdrop of a slowly improving economy and a market that remains receptive to new issues sets the stage for a lower default rate and potentially additional capital appreciation for high yield bonds as we move into the new year.
Strategy Review
One notable trend in our asset class during the last months of 2009 was the emergence of financial services industry as one of the largest sectors in our market. Comprised mostly of fallen angels that have drifted lower in credit quality as a consequence of the credit crisis, most high yield benchmarks now place financials at around 10% of all outstanding high yield debt. CIT, SLM Corp and even lower tranches of AIG and Bank of America now populate the universe of debt with ratings below investment grade. When CIT emerged from bankruptcy in December, it immediately became one of the largest high yield issuers. We continue to carefully evaluate the financial services credits as they enter our universe and have found many attractive for inclusion in the portfolio. A steep yield curve and federal government support has us anticipating good performance out of this increasingly important sector.
We continued to emphasize higher yielding, medium and lower quality credits as we managed the portfolio at the end of the year. For example, we added a significant position in wireless spectrum player Clearwire in November. The company issued 12% bonds due 2015, with the securities rated Caa1/B-. Similarly, we increased our position in Intelsat Bermuda 11.5% notes of 2017. We hold strong conviction on these companies fundamentally, but also believe these types of securities will prove defensive in a rising interest rate environment. Conversely, we are deemphasizing lower coupon, longer duration BB rated bonds on the view that they may suffer in price should rates move higher in 2010.
Outlook
High yield bonds delivered solid gains in 1992 and 2004, following spectacular results in the years prior. While that offers no guarantee results for 2010 will follow a similar pattern after 2009's heady gains, we think it is worth considering investors may still earn high current income and some additional capital appreciation this year. In spite of our positive perspective on the market, we are ever cautious regarding signs of bad behavior returning to the asset class and we are constantly on the lookout for questionable structures, weak covenants and skimpy pricing for new deals. It is our intent to remain ever vigilant in our research and we do not intend to compromise our credit standards as we strive to protect the hard earned gains the fund has enjoyed over the past year.
Sincerely,
Robert F. Birch
President
The New America High Income Fund, Inc. |
Mark Vaselkiv
Vice President
T. Rowe Price Associates, Inc. |
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Ellen E. Terry
Vice President
The New America High Income, Inc. |
Paul Karpers
Vice President
T. Rowe Price Associates, Inc. |
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.
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