Floating Rate Favorites

08/21/2015 9:00 am EST


Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Bond investors who expect higher short-term rates have few places to go. However, one of those areas is bank loans, the yields of which change quickly along with changes in short-term rates, explains Mark Salzinger, editor of The No-Load Fund Investor.

Bank loans are typically floating rate borrowings issued by banks to medium quality companies, corporate borrowers at the bottom rung of investment grade or the top two grades (BB and B) of below investment grade.

Instead of a set payout, these debt instruments are priced at a spread to a money market rate, so the actual payouts change along with short-term rates.

Therefore, unlike most other debt, their prices go down very little when interest rates rise.

We include two funds in our Best Buys list that invest mainly in collateralized, floating rate bank loans: Fidelity Floating Rate High Income (FFRHX) and Price Floating Rate (PRFRX).

Though the Fidelity offering is much older and has billions more in assets, Price Floating Rate has been better of late. In fact, over the three-year period ended July 31, 2015, the Price offering has produced an annualized return of 4.0% vs. 3.1% for Fidelity’s competitor.

So far in 2015, the Price fund has gained 3.4%, among the best in the category, while Fidelity Floating Rate is up a more average 2.2%.

Paul Massaro has managed Price Floating Rate since its July 2011 inception. The fund’s total returns have been aided both by significant positions in outperforming issues as well as lower weightings in underperforming ones.

For example, Massaro has added recently to the fund’s positions in healthcare floating rate debt. On the other hand, the fund has less than most of its competitors in the energy sector.

Though the fund includes very little in investment-grade debt, the vast majority of its issues come with credit ratings of ‘B’ or better. The current yield is 4.0% and the expense ratio is 0.85%.

Though we prefer the Price offering, Fidelity investors certainly should feel comfortable purchasing shares of Fidelity Floating Rate.

Managed by Eric Mollenhauer since April 2013, most of the fund’s issues offer credit ratings of at least B. It has a low expense ratio of 0.69% and a diversified portfolio spread among debt from at least 20 sectors and industries.

Areas with the largest exposures within the fund include technology, healthcare, telecom, gaming, and energy. The current yield is 3.7%.

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