Floating Rate Funds

[marko]

There seems to be a few new threads about bond funds and fixed income of late.

I'm considering TRPrice's Floating Rate Fund (PRFRX) as, after 20 years, I've become disillusioned with their Spectrum Income Fund (RPSIX) over the past year or so and more so of late.

Just wondering if anyone has any insights to such funds, not necessarily TRP's but in general and how the rise in interest rates might affect it.

I understand that they are more weighted toward floating rate bank loans vs bonds but bonds seem to make up a part of their portfolio.

Comments?

 

[daylatedollarshort]

I dumped our floating rate fund earlier in the year as it was tanking. Floating rates can be kind of risky during recessions, and since that probability seems high, that was another reason to dump them. I've got that cash in stable value, Treasuries and some TIPS I picked up on the secondary market that mature in 1 - 2 years, until the planned rate increases top off. We're not holding any bond funds at all for now.

 

[Montecfo]

I own the fund and it's been solid this year.

Last year I held a floating rate closed-end fund, FRA, that was was fabulous, though the discount had largely closed by year end, so I replaced it with PRFRX.

I started buying floaters at the start of last year because I felt we were in the perfect environment for them: rising interest rates and strong economy. A recession would be a bit of a drag and if treasuries keep looking so attractive I could be pursued to add my PRFRX tranche to my treasury stake but holding tight for now.

 

[marko]

I own the fund and it's been solid this year.

Last year I held a floating rate closed-end fund, FRA, that was was fabulous, though the discount had largely closed by year end, so I replaced it with PRFRX.

I started buying floaters at the start of last year because I felt we were in the perfect environment for them: rising interest rates and strong economy. A recession would be a bit of a drag and if treasuries keep looking so attractive I could be pursued to add my PRFRX tranche to my treasury stake but holding tight for now.

Thanks. "Buy and hold" is so ingrained in me that I plan to give RPSIX one more chance at the end of this month to see if rising rates will redeem it yield-wise despite a falling price. If not, I plan to move a chunk.

 

[copyright1997reloaded]

I seem to remember these being "problematic" during the 2008/09 timeframe as counter party risk became "exposed". I'm too lazy to look up old threads...

 

[COcheesehead]

Have you looked at the composition of these? PRFRX is 70% B rated and below. That’s horrible quality all for a 3.5%+ 10 year Ave return. These funds are short term loans for those with bad credit. When the economy turns these will too.
The yield is only 3.2% and today that sucks. I can buy investment grade bonds that deliver well above that.
I would not personally put any money into this type of investment.

 

[Montecfo]

Have you looked at the composition of these? PRFRX is 70% B rated and below. That’s horrible quality all for a 3.5%+ 10 year Ave return. These funds are short term loans for those with bad credit. When the economy turns these will too.
The yield is only 3.2% and today that sucks. I can buy investment grade bonds that deliver well above that.
I would not personally put any money into this type of investment.

Well I am not doing a 10 year investment. Loss rates are extraordinarily low in an expanding economy. And the rates float up as rates rise, so little to no rate risk. Your investment rate bonds carry rate risk that I find unacceptable. I jettisoned those.

That's the value proposition. I made double digits on floaters last year. And if economy turns down I will look for the exits, maybe even earlier if treasuries keep ticking up.

 

[COcheesehead]

Well I am not doing a 10 year investment. Loss rates are extraordinarily low in an expanding economy. And the rates float up as rates rise, so little to no rate risk. Your investment rate bonds carry rate risk that I find unacceptable. I jettisoned those.

That's the value proposition. I made double digits on floaters last year. And if economy turns down I will look for the exits, maybe even earlier if treasuries keep ticking up.

So I did a poor job writing my post because the important points were missed or misunderstood.

I quoted the 10 average return because that was the most generous. If you go shorter term, the returns are .05% YTD or 2.71% for a year all for owning what the industry considers junk grade instruments when investment grade bonds are now returning higher yields.

I am not sure how someone makes double digit returns in this fund in one year. Perhaps you used another.

Fidelity quotes investment grade bonds today in 2yr -5yr in the 4%-5% yield range and if you own the bond, there is no NAV erosion since the bond will return to its face value known as par.

 

[Montecfo]

Lots of money is made all the time on junk bonds. You perhaps should avoid them if that element by itself seems objectionable.

The premise of the investment in this case is to take credit risk, but avoid the very obvious interest rate risk inherent in most corners of the bond market presently. And that has worked to this point. But these are not long-term holdings for me, they are a tactical investment synced to a very unusual interest rate environment.

And I think I fully understood your post previously. I just think anyone who finds an investment not to meet their risk profile should simply avoid that investment. That's more productive than saying they are "horrible quality" and that the "yield sucks". The total return is what matters. And people who hold "high quality" corporates in this environment are chewing on high quality losses at present. There is thread after thread of evidence.

Last year I held the CEF, FRA. I made 12-18 pct including closing of discount on the fund. I have been clear I did not own PRFRX, which in fact has an excellent track record, until this year. It was laid out clearly in post #3.

Good investing.

 

[COcheesehead]

My point: you can invest in investment grade assets and get a better return - right now. There are better alternatives.

 

[daylatedollarshort]

My point: you can invest in investment grade assets and get a better return - right now. There are better alternatives.

+1. Why take on more credit risk for lower returns?

 

[Montecfo]

My point: you can invest in investment grade assets and get a better return - right now. There are better alternatives.

All year that has not been the case.

Show me one with comparable duration and I would be interested.

 

[COcheesehead]

All year that has not been the case.

Show me one with comparable duration and I would be interested.

Close in duration…
Investment grade, 3.10% for a 1 year. 4.4% for a 2 year - taken right from Fidelity’s bond page.
The average maturity of PRFRX is 5 years. If you go out that far, you can get 5.42%.

Here’s my point of view. I don’t like bonds funds. There is too much market risk. Anyone in them recently has seen asset erosion in just about all of them and it may get worse.

I buy individual bonds, ladder them and hold to maturity. It’s stodgy and boring and hasn’t lost me a penny yet. It also provides a nice 6 figure income for us until we reach full retirement for social security.

I buy bonds strictly for income. I don’t expect growth or an inflation hedge. I have other things for that.

 

[Montecfo]

Close in duration…
Investment grade, 3.10% for a 1 year. 4.4% for a 2 year - taken right from Fidelity’s bond page.
The average maturity of PRFRX is 5 years. If you go out that far, you can get 5.42%.

Here’s my point of view. I don’t like bonds funds. There is too much market risk. Anyone in them recently has seen asset erosion in just about all of them and it may get worse.

I buy individual bonds, ladder them and hold to maturity. It’s stodgy and boring and hasn’t lost me a penny yet. It also provides a nice 6 figure income for us until we reach full retirement for social security.

I buy bonds strictly for income. I don’t expect growth or an inflation hedge. I have other things for that.

Reapectfully, you misunderstand the duration. The duration of PRFRX is 6 months or less. Why? Because the rate is variable. Go look at Morningstar or TRowePrice.

And as far as disliking bond funds, that is fine but it is in essence a religious viewpoint. Bond funds have pluses and minuses. Individual bonds have pluses and minuses. Regardless of which you prefer, you are selecting a form of investment that has advantages and disadvantages compared to the other.

Your individual bonds have declined in value this year. You may wish to ignore because you have no plan to sell but it is still true.

So I do not get too tied up in that part of the discussion. And of course the OP asked about a specific fund, not yours or my view on individual bonds.

 

[COcheesehead]

Reapectfully, you misunderstand the duration. The duration of PRFRX is 6 months or less. Why? Because the rate is variable. Go look at Morningstar or TRowePrice.

And as far as disliking bond funds, that is fine but it is in essence a religious viewpoint. Bond funds have pluses and minuses. Individual bonds have pluses and minuses. Regardless of which you prefer, you are selecting a form of investment that has advantages and disadvantages compared to the other.

Your individual bonds have declined in value this year. You may wish to ignore because you have no plan to sell but it is still true.

So I do not get too tied up in that part of the discussion. And of course the OP asked about a specific fund, not yours or my view on individual bonds.

I get the duration, hence why I said “close” in my post.
The OP asked about floating rate funds. I responded to their question and you jumped in.
Enough said.

 

[Phroig]

I dumped our floating rate fund earlier in the year as it was tanking. Floating rates can be kind of risky during recessions, and since that probability seems high, that was another reason to dump them. I've got that cash in stable value, Treasuries and some TIPS I picked up on the secondary market that mature in 1 - 2 years, until the planned rate increases top off. We're not holding any bond funds at all for now.

I had the Fidelity fund FFRHX, but I also sold earlier this year. The fund wasn't holding up as well as I thought it might. I checked its performance during the 2017-18 rate hike period, and it did quite poorly, as did PRFRX. It seems like these funds do well in anticipation of increasing rates, but not when rates are actually increasing.


Both funds have come back a bit after falling earlier in the year. FFRHX shows a return of 0.5% YTD, and PRFRX is essentially breaking even.

 

[daylatedollarshort]

Your individual bonds have declined in value this year. You may wish to ignore because you have no plan to sell but it is still true.

Individual bonds with a maturity date have not declined in what they will be redeemed for at maturity.

 

[COcheesehead]

Individual bonds with a maturity date have not declined in what they will be redeemed for at maturity.

The one thing a fund will never have…par value.

 

[Montecfo]

I get the duration, hence why I said “close” in my post.
The OP asked about floating rate funds. I responded to their question and you jumped in.
Enough said.

Five years is not "close" to 6 months. That's roughly 9x the interest rate risk.

 

[Montecfo]

Individual bonds with a maturity date have not declined in what they will be redeemed for at maturity.

Their value moves every day, and mostly down this year. It is true regardless of how held.

 

[COcheesehead]

Five years is not "close" to 6 months. That's roughly 9x the interest rate risk.

My gosh…

I quoted one year and two year notes and said they were “close”.

The five year note was related to average maturity in the fund and I clearly stated that.

You continue to misunderstand my posts.

 

[marko]

OP here. Talk about thread drift! Can we all just get along?

 

[COcheesehead]

OP here. Talk about thread drift! Can we all just get along?

I agree.