We are pleased to report to our shareholders on the results of The New America High Income Fund (the "Fund") for the period ended June 30, 2019. The Fund's net asset value (the "NAV") was $9.86 as of June 30th. The market price for the Fund's shares ended the period at $8.87, representing a market price discount of 10.0%. The Fund paid dividends totaling $0.275 per share from earnings during the six month period. The annualized dividend yield on a share of common stock purchased at the year-end 2018 price of $7.56 was 8.7%
As of June 30th, the Fund's outstanding borrowings through its credit facility (the "Facility") with the Bank of Nova Scotia was $91 million, unchanged from borrowings at year-end. The borrowings represented approximately 28.3% of the Fund's total assets. Amounts borrowed under the Facility bear interest at an adjustable rate based on a margin above LIBOR. The interest rate on the Facility as of June 30th was 3.25%. While the market value-weighted average current yield of 6.91% on the Fund's portfolio remains attractive compared with the interest rate of 3.25% paid on the Facility, the yield spread has continued to narrow. As of June 30th, the yield spread between the cost of borrowing and the portfolio's market value-weighted average current yield was 3.66 percentage points, compared with 4.05 percentage points as of December 31st. The Fund's leverage contributed approximately 14% of the net income earned in the period, compared to 17% of the net income in 2018 and 20% of the net income earned in 2017.
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, the extent to which the portfolio is fully invested and operating expenses, among other factors. Leverage magnifies the effect of price movements on the Fund's net asset value per share. The Fund's leverage increases the Fund's total return in periods of positive high yield market performance. Of course, the opposite is true in an unfavorable high yield market.
||Total Returns for the Periods Ending
June 30, 2019
||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 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. 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 almost 10% for the six months ended June 30th, the strongest start to the year since 2009, according to the Credit Suisse High Yield Index (the "Index"). U.S. Treasury yields fell as slowing economic growth and tariff concerns led to increasingly dovish signals from the Federal Reserve (the "Fed") and other developed market central banks. The benchmark U.S. 10 Year Treasury note's yield dropped from 2.7% to 2.0%, its lowest level since November 2016, and yields of other maturities also declined significantly. While the Fed left its short-term lending rate unchanged during the period, the central bank noted increased uncertainties around the economic outlook at its June meeting. Fed policymakers, who have been advocating a patient approach to interest rate adjustments, signaled a willingness to cut rates if necessary to sustain the expansion. Trade tensions with China and Mexico added confusion during the period. Tariffs on imports from Mexico were suspended and an announcement of a truce to temporarily prevent the imposition of further tariffs on Chinese goods eventually appeased the markets.
Amid mounting trade tensions, equity market losses, and commodities weakness in May, high yield bond prices fell, marking the only month of high yield market losses through the first half of the year. All industries posted gains except energy. Higher credit quality issues within the high yield sector outperformed due to the positive rate backdrop. The yield spread of the Index tightened by more than 120 basis points during the six month period ended June 30th, ending the period at 452 basis points over U.S. 10 Year Treasuries, with a yield-to-worst of 6.3%, which were lower than the twenty year averages of approximately 607 basis points and 8.9%, respectively.
Net investor cash inflows to the high yield market have occurred in every month, except May, of this year, after the high yield market experienced more than $45 billion in redemptions in 2018. Gross new issue activity increased from the first quarter to the second. Year-to-date gross new issue volume is up 11% from the same period in 2018 as issuers tap the high yield market again after elevated use of leveraged loan issuance the previous two years. The proceeds of most new issues were used to refinance existing debt to lower coupons and extend debt maturities, thereby strengthening issuers' balance sheets and lowering high yield market default expectations.
The J.P. Morgan par-weighted default rate tracked lower, ending June at approximately 1.5%, lower than the twenty year average of 3.1%. In the first six months of the year, 20 companies defaulted on $20.9 billion of debt. The energy sector has accounted for the highest percentage of high yield debt defaults year-to-date, affecting $5.8 billion of bonds and loans. Nonetheless, limited default activity suggests overall credit quality in the asset class remains healthy.
The high yield bond asset class has produced only six calendar years of losses in the last 40 years, and has never had two consecutive negative years of performance. We believe returns in the second half of the year may not be as strong as the outsized gains in the first half. While valuations are attractive compared with many alternative fixed income sectors, they are not as compelling as they were at the start of the year. The portfolio's duration is shorter than that of the Index, consistent with a more defensive strategy.
The portfolio's investments in health care companies Avantor and Bausch Health were notable relative performance contributors. Avantor, a leading provider of product and service solutions to laboratory and production companies, has become one of our highest-conviction holdings. The company's recently completed initial public offering was supportive for the credit, as a large portion of the proceeds will be used to pay down Avantor's debt. The portfolio is invested in securities throughout Avantor's capital structure, including bonds and convertible preferred stock. Bausch Health is a global company that develops, manufactures and markets a broad range of pharmaceutical, medical device and over-the-counter products. Although it carries significant debt on its balance sheet, management has been making progress on reducing leverage. Moreover, we believe that the company's fundamentals are improving, as Bausch has a highly stable, growing business in contact lenses and ophthalmology.
Charter Communications a leading broadband communications company and the second-largest U.S. cable company, was a top relative performance contributor. Charter is a credit that has a combination of a relatively high interest rate and low default outlook and may be a candidate for further credit upgrades. The company posted solid results in the first quarter of 2019 as revenue increased year over year, capital expenditures declined, and its liquidity position remained strong. Netflix, another cable industry investment, also contributed to relative returns. With a growing content library, nearly unlimited shelf space, and an everyday low price, the company is almost single-handedly disrupting the traditional linear pay television ecosystem.
The energy sector continues to be a source of volatility as oil prices fluctuate based on geopolitical developments throughout the globe. The Fund is underweight the industry and invested in relatively high quality issuers. In addition, energy investments are focused on midstream companies due to their more defensive characteristics within the oil ecosystem. Targa Resources is a leading midstream company with a diverse and high-quality asset base. The company’s growth strategy is focused on the best-in-class Permian Basin. The company’s gathering and processing assets in the Permian Basin are well integrated with its Gulf Coast downstream assets. Commodity price exposure is low, and Targa's management maintains financial policies that should contribute to a stable credit profile.
Floating rate bank loans represent the largest off-Index allocation in the portfolio at 8.3% of assets at the end of June. The senior secured status and a low duration profile of bank loans have historically produced less volatile returns compared with high yield bonds. In the rising rate environment throughout 2017 and 2018, the floating rate feature of bank loans reset coupons higher as rates increased. The portfolio's allocation to bank loans peaked at 9.6% of portfolio assets in April 2019. However, these characteristics resulted in the Fund's bank loan investments underperforming high yield bonds in the strong high yield bond market of the first half of the year. Although the Fed appears to be moving to a more accommodative interest rate posture, removing the potential benefit of higher coupons, a 6% yield in senior secured debt offered by many bank loans appears to remain attractive.
The macroeconomic backdrop is having a significant influence on market sentiment, while individual high yield company fundamentals remain largely solid. Slowing economic growth from the first quarter, the Fed's interest rate strategy, trade tensions, and the upcoming election have created a cloud of uncertainty that is likely to persist - particularly if the Fed remains on hold. Investors are eagerly anticipating an "insurance" rate cut that would support the performance of financial markets, but this may not occur. Nevertheless, the current environment is broadly supportive of fixed income strategies, as coupon payments provide a reliable income source that enhances the appeal of bonds amid turbulent market conditions.
The high yield asset class continues to demonstrate its resilience. After posting a loss in 2018, the high yield market began this year with its strongest quarterly performance in 10 years resulting in the Index's six-month return of 10%. Steady economic growth, albeit at a slower pace, creates a healthy environment for below investment-grade companies. Growth may be at a "sweet spot" - strong enough for businesses to grow and improve credit quality, but not so strong that the Fed aggressively raises interest rates. We believe default activity may remain low over the next 12 months. Renewed cash inflows in recognition of the attractive 6%-7% yield offered by the asset class are also market supportive.
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.