If 'High Yield' Is So Scary, Why Do You Own So Much? (Hey, I'm Talking To You, Equity Investor!)

"High yield" is one of those topics that many authors and readers seem to love to wring their hands over. A recent example is this article, on which I commented in an effort to provide some perspective: The High Yield 'Fear Factor' - Hype Or Harbinger? And this one: Leveraged Loans Major Concern for Janney's Fixed income Chief.
Credit risks abound in all credit investments, like high yield bonds, senior secured loans (sometimes called "leveraged loans"), collateralized loan obligations ("CLOs," which are securitized vehicles that buy loans), business development companies ("BDCs," which are companies that lend to small and medium sized companies). But they are nothing new and are the sort of risks that bankers and credit professionals have been analyzing, modeling, managing and projecting for years.
But you say you don't invest in high yield? Not so fast. Many investors who only invest in equities insist that "high yield" is something too risky that they would never touch. Many don't realize that their equity portfolios are chock full of high yield companies, and that, as stockholders, they are actually in a riskier position - lower down the liability side of the balance sheet - than the investors in those "too risky" high yield bonds and loans that are senior to them.
Do you own any mid-cap funds? Any small-cap funds? The overwhelming majority of corporations are "non-investment... Read more