The semi-annual report for The New America High Income Fund (the "Fund") for the period ended June 30, 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 $9.66 as of June 30th. The market price for the Fund's shares ended the period at $8.62, representing a market price discount of 10.8%. The Fund paid dividends totaling $0.283 per share from earnings during the six month period. The annualized dividend yield on a share of common stock purchased at the year-end 2017 price of $9.40 was 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 29% 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 the six month period as LIBOR rose following two increases in the Federal Funds rate. The interest rate on the Facility as of June 30th was 2.93%. While the market value-weighted average current yield of 6.98% on the Fund's portfolio is attractive compared with the interest rate of 2.93% paid on the Facility, the yield spread is much less attractive than it was in recent prior periods. One year ago the Fund was paying 2.13% on its borrowings and earning a market value-weighted average current yield on the portfolio of 6.79% for a yield spread of 4.66 percentage points. As of June 30th, the yield spread between the cost of borrowing and the market value-weighted average current yield was 4.05 percentage points. The Fund's leverage contributed approximately 17% of the net income earned in the period, compared to 20% of the net income in 2017 and 23% of the net income earned in 2016.
The Federal Reserve (the "Fed") has indicated that, if economic trends continue, investors should expect further increases in the Fed Funds rate later in 2018. While increases in interest rates are one risk that bond investors face, it's important to remember that bonds 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 sensitivity to changes in interest rates. High yield bonds have relatively shorter 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, resulting in greater price volatility than investment grade bonds in changing economic conditions.
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, 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 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.
High yield bonds returned 0.20% in the first half of 2018 according to the Credit Suisse High Yield Index (the "Index"). The expectation of synchronized global growth came under pressure as the U.S economy accelerated relative to other areas in the first half of the year. The U.S. high yield market was relatively resilient compared with eurozone and emerging regions as those markets further succumbed to negative geopolitical developments. In the U.S., solid economic data seemed to bolster the Fed's confidence in its path toward normalizing monetary policy. The unemployment rate fell to an 18-year low of 3.8% and various inflation measures were at or slightly above the Fed's 2% target. Although first-quarter gross domestic product was revised down to a 2.0% annualized rate, preliminary data have pointed to a strong pickup in the second quarter. The Fed raised the target range for the Federal Funds rate to 1.75%-2.0% at its June meeting, the second increase this year. Trade tensions periodically weighed on market sentiment, as the U.S. imposed tariffs on various imports from China and other major trading partners, including Canada, Mexico, and the European Union. Many of these nations retaliated or threatened to do so, sparking fears that continued trade disputes could hamper global commerce and, thus, the worldwide economic expansion. Oil prices rallied to multiyear highs by the end of June due to OPEC's announcement of a much lower-than-anticipated production increase, reports of falling inventories, and the potential for supply disruptions.
In this environment, CCC rated bonds posted positive returns, outperforming higher quality issues within the high yield sector. The outperformance of lower quality bonds was largely a function of interest rates moving higher, as CCC securities typically have a shorter duration than higher quality bonds. A lower default environment was also supportive. Performance by industry was mixed. The food, retail and energy sectors outperformed the broad market. Conversely, transportation and forest products/containers industries declined over the period. The yield spread of the Index compared to U.S. Treasury notes widened a modest 5 basis points during the six months, ending the period at 399 basis points with a yield to worst of 6.64%. This compares with the ten year averages of approximately 635 basis points and 7.90%, respectively.
Technical conditions were mixed. According to J.P. Morgan, high yield mutual funds saw outflows through the end of June. However, new issue activity also declined compared to the same period in 2017, with gross issuance of $126.3 billion. Even so, considering calls, tenders, and maturities, net supply registered as negative, helping to minimize declines in the asset class caused by outflows. Other than the expected bankruptcy filing of iHeartMedia in the first quarter, there were relatively few defaults in the period. The J.P. Morgan par-weighted default rate ended the period at 1.98% compared with the historical average of 3.75%.
Portfolio investments in regions outside of North America detracted from returns. Financials have been a top performer in recent years. However, several of the Fund's positions traded lower over the second quarter, particularly Italian banks, including Unicredit and Intesa Sanpaolo. While these banks remain well capitalized, the issues traded lower due to investors' concerns following the Italian election. The Fund continues to hold these securities, which we believe have stable to improving credit characteristics with high coupons that offer short, stable income and are likely to be refinanced at their coupon reset dates.
The portfolio's investments in the media/telecommunications sector detracted significantly from total return during the period. The investment team continues to have a positive outlook 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. We expect most cable operators to exhibit stable credit profiles over the intermediate-term. Charter Communications and Altice remain top positions in the Fund. Charter is a crossover credit and benefits from significant scale as the second largest U.S. cable operator.
Security selection within the CCC rating tier was also a notable detractor from performance. The Fund's CCC rated securities are in issuers that we believe may be upgraded to B or are mis-rated by the credit rating agencies. However, the issuers that drove the outsized gains in that CCC sector were the weaker issuers of the rating category. On the higher end of the rating spectrum, the Fund's allocation to floating rate bank loans benefitted the portfolio. Bank debt composes 7.5% of Fund's assets as of June 30, 2018. In the current rising rate environment, the floating rate feature of bank loans is attractive.
Steady economic growth is supportive to below investment-grade issuers, as they are typically more sensitive to macroeconomic factors. However, global geopolitics, including potential tariff wars, populist sentiment within the European Union, and ongoing rhetoric out of Washington D.C. create a notable level of uncertainty. Fed policy is also a concern. Thus far, the high yield bond market has held up reasonably well. Corporate fundamentals are largely stable, and we believe default activity will remain below the historical average this year into next. In addition, we continue to like bank loans for their floating rate feature as Fed officials have signaled the likelihood of two more short-term rate increases in 2018.
Absolute yields have risen to more attractive levels but remain below the long-term average. Higher-quality issuers in the high yield market are paying 6% to 7% on their new issuance versus less than 5% six months ago. We have also been able to buy bonds trading below par, but we do not expect capital appreciation to be a significant factor in our returns over the intermediate term. We remain cognizant of volatility, largely external to the high yield market, that could still impact the below investment-grade asset class.
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.