Floating Rate Favorites

10/09/2013 9:00 am EST


Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Most floating rate debt takes the form of loans from banks to below investment-grade companies. The interest paid varies with changes in very short-term interest rates, explains Mark Salzinger, editor of No-Load Fund Investor.

The loans are senior in the credit hierarchy to regular high-yield issuance, and are often backed by specific collateral.

As a result of these three factors, they are less volatile than other high-yield products, and should be of particular interest to investors who believe that interest rates will rise.

Price Floating Rate (US:PRFRX) yields about 3.5%, and has a total return of 2.7% year to date. About half the portfolio is upper tier in quality within the high-yield market.

According to Price, about half the assets are invested in bonds from cyclical companies, and half defensive. The expense ratio is capped at 0.85% through September 30, 2015.

Fidelity offers Floating Rate High Income (US:FFRHX), which currently yields about 2.6%, and has a total return of 2.3% year to date.

The fund's disappointing current yield reflects a high aggregate credit profile (about half BBB and BB) and a moderately high cash residual (recently about 8%). A current concern is that the fund's long-time manager, Christine McConnell, left the fund in March 2013.

However, Fidelity certainly has a formidable team of high-yield credit analysts to help the new manager, Eric Mollenhauer, who has been a member of the firm's high-yield team for nearly two decades.

Over the past five years, FFRHX has produced an annualized gain of 6.1%, which isn't all that impressive.

However, the fund has been considerably less volatile than its high-yield siblings. In 2008, it lost 16.5%, which, while egregious in an absolute sense, was about 10 percentage points less damaging than the loss experienced by the average high-yield bond fund. The expense ratio is 0.71%.

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