Are you looking to add some fixed income to your portfolio? Unhappy with bond volatility? You may want to look into a fund that focuses on floating rate bank loans. Today we take a look at the Fidelity Floating Rate High Income Fund (FFRHX). While a fund like this won’t set your portfolio on fire it can provide some excellent stability in otherwise turbulent markets.
When investing in bonds interest rates can wreak havoc on volatility. In a rising rate environment you see bond prices going down and when rates are going down the bond prices rise. While they can provide more stability than equities in the form of regular interest payments they can still add volatility to your portfolio. A floating rate fund is perfect for those who are looking for steady income without the underlying volatility associated with other fixed income alternatives.
- Manager: Christine McConnel (5 year tenure)
- Min. Initial Investment: $2,500
- Front-Load: None
- 12(b)-1 Fee: None
- Expense Ratio: 0.81%
- Net Assets: $3.2 billion
- Average Market Cap: N/A
- Turnover: 61%
Clearly there is nothing very exciting about this chart but there are a few things I would like to point out. You can see the lack of volatility with this fund by how straight the red line is. Over the past few years the yield has not wavered much. Compare that to the green line which is the Lehman Brothers Aggregate index.
As you can see, the broad bond market has been more volatile and had you relied on that index for your fixed income portion of your portfolio you would have underperformed. Given the stability of the underlying price and favorable yield it has proven to be a solid performer.
- No load
- Expense ratio lower than category average
- Fund offers daily redemptions
- Very low volatility
- Competitive yield
- Not the absolute best in the category
- Sometimes large cash position can hold back performance
- Yield may lag in decreasing interest rate environment
The Bottom Line
You may find the timing of discussing this fund a bit odd. Since we are currently at a stable and potentially decreasing interest rate environment this may seem a bit off. While it is true that with regular fixed income fund offerings you can realize some capital appreciation when rates are decreasing that doesn’t dismiss the potential for a floating rate fund. And since most floating rate funds restrict when you can sell to quarterly at most, this fund has daily redemptions which provides a significant liquidity advantage over other funds in this asset class.
Trying to time your fixed income allocation with interest rate movements is no different than trying to time your equity buying and selling with market conditions. If you are looking for attractive yields with very low volatility a fund like this can greatly improve your risk-adjusted returns over the long term.
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Filed Under: Fund Reviews
About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.