Mutual Fund Review: Fidelity Floating Rate High Income (FFRHX)

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.

Key Stats

  • 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%

Performance

FFRHXClearly 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.

Pros

  • No load
  • Expense ratio lower than category average
  • Fund offers daily redemptions
  • Very low volatility
  • Competitive yield

Cons

  • 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.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

4 comments
SS
SS

this fund is down for me 4.5% in last 4 months. Why did it go down when interest rate is stable? is this fund going to make money?

GB
GB

can anybody tell me why this thing took such a hit in 2008, I know they buy some low quality but it looks like they really got walloped?

mic
mic

sweet yieldbut it turns sour when share price broke, and it was a major break...next support price 9.33 down another 2.4%
stay clear, less sales charge by just buying a bank stock with a high yield, ie WM

Big Steve
Big Steve

I can dig it... have some FFRHX in my Fidelity IRA. I got in at a bad time about 3 months ago, and have actually lost money at this point. But maybe it will be a good long term deal.
Plus the manager looks pretty good. That can't hurt.