Stock Analysis & Valuation Western Asset High Income Fund II Inc. (HIX)

• Previous Close: $4.24
• Sector Valuation Confidence Level: High

Valuation method	Value, $	Upside, %
Artificial intelligence (AI)	33.30	685
Intrinsic value (DCF)	10.23	141
Graham-Dodd Method		n/a
Graham Formula	18.19	329

Strategic Investment Analysis

Company Overview

Western Asset High Income Fund II Inc. (NYSE: HIX) is a closed-end fixed income mutual fund managed by Legg Mason Partners Fund Advisor, LLC, with co-management by Western Asset Management affiliates. Specializing in global high-yield debt securities, HIX invests in U.S. and foreign corporate and sovereign issuers across diversified sectors. The fund employs a rigorous bottom-up security selection process, combining quantitative and fundamental analysis, and benchmarks its performance against the Barclays Capital U.S. Corporate High Yield 2% Issuer Cap Index and the JPMorgan Emerging Markets Bond Index Global. Launched in 1998, HIX provides investors with exposure to high-income-generating fixed-income assets, making it a strategic choice for yield-seeking portfolios in the Financial Services sector. With a focus on risk-adjusted returns, HIX is positioned as a key player in the Asset Management - Income industry, catering to investors looking for diversified high-yield bond exposure.

Investment Summary

Western Asset High Income Fund II Inc. (HIX) offers an attractive proposition for income-focused investors, with a dividend yield of approximately 9.8% (based on a $0.588 annual dividend per share and recent share price). The fund's diversified high-yield bond portfolio provides exposure to global fixed-income markets, though it carries inherent credit and interest rate risks typical of the asset class. While the fund has demonstrated solid net income ($29.3M in FY 2024), its negative operating cash flow (-$122.6M) and significant leverage (total debt of $178.6M against $402K in cash) warrant caution. The fund's 0.954 beta suggests it is slightly less volatile than the broader market, which may appeal to risk-conscious fixed-income investors. The fund's performance is highly dependent on Western Asset Management's credit selection capabilities in a challenging high-yield environment.

Competitive Analysis

Western Asset High Income Fund II Inc. (HIX) competes in the crowded high-yield closed-end fund space, differentiating itself through Western Asset Management's global fixed-income expertise and multi-sector approach. The fund's competitive advantage lies in its ability to tap into Western Asset's extensive credit research capabilities and global network, allowing for security selection across U.S. and international high-yield markets. However, the fund faces significant competition from both passive high-yield ETFs and actively managed peers. Its use of leverage (approximately 32% of total assets) enhances yield but also increases risk compared to unleveraged alternatives. The fund's 0.33% expense ratio is competitive for active management but higher than passive alternatives. HIX's performance is closely tied to Western Asset's ability to navigate credit cycles and identify mispriced securities in the high-yield space. The fund's focus on both domestic and emerging markets debt provides diversification benefits but also exposes it to currency and geopolitical risks that more U.S.-focused competitors avoid.

Major Competitors

• BlackRock Corporate High Yield Fund (HYT): HYT is a larger competitor ($1.4B AUM) with BlackRock's extensive credit research capabilities. It offers broader diversification but with a higher expense ratio (0.95%). HYT has consistently traded at a smaller discount to NAV compared to HIX.
• Credit Suisse High Yield Bond Fund (DHY): DHY focuses more narrowly on U.S. high-yield corporate debt, avoiding HIX's emerging markets exposure. It has lower leverage (about 22%) but also lower yield. DHY's smaller size ($250M AUM) may limit its trading liquidity compared to HIX.
• iShares iBoxx $ High Yield Corporate Bond ETF (HYG): As a passive ETF, HYG offers similar high-yield exposure at lower cost (0.49% expense ratio) and greater liquidity. However, it lacks HIX's active management and potential for alpha generation through security selection.
• SPDR Bloomberg High Yield Bond ETF (JNK): JNK is another passive high-yield ETF competitor with even lower fees (0.40%). Its pure index approach contrasts with HIX's active strategy, appealing to different investor segments seeking either low-cost beta or active management potential.
• PIMCO High Income Fund (PHK): PHK employs a more aggressive strategy with higher leverage (about 43%) and broader mandate including distressed debt. While offering higher yield potential, PHK is more volatile than HIX and has historically traded at significant premiums to NAV.