I am looking to replace most of my IB (GIBLX) and some of my MU (PTIAX) monies (I'm holding onto PONDX) with a bank loan or something that is going to do a better in, what appears to now be, a rising interest rate environment.
There's a lot of positive discussion about SAMBX (Ridgeworth Floating rate) but not much on Lord Abbett Floating Rate (LFRAX.LW). I've been doing some research and came across this OEF, among a few others.
LFRAX metrics are superior to SAMBX, and its returns are equally as solid.
Any thoughts on LFRAW (LW at FIDO) vs. SAMBX or any other BL funds??
Am I premature (or too late) thinking about this move. I just don't see GIBLX or PTIAX doing very well as interest rates rise. Am I misguided, panicking, wrong????
Thanks, Matt
Comments
Bank loan funds have their own risks. Often the loans they invest in have floor rates of 1%, and are keyed to 3 month LIBOR. That's currently at 0.88%. Until it rises above 1%, the interest rates on these loans won't rise (since they are already above LIBOR). So these don't float - yet (it's close). So they still have a bit of interest rate risk.
http://www.schwab.com/public/schwab/nn/articles/Is-it-Time-to-Consider-Bank-Loan-Funds (August report)
They also have credit risk. The debt they own has low credit ratings (around B). Consequently the debt behaves more like stocks and is sensitive to the economy. If rising rates depress stocks, these funds may start experiencing defaults. The good news is that since they hold senior loans, they would likely recover more of their principal than would typical junk bond funds. Still, there's a real risk of default and getting less than 100 cents on the dollar.
I'm inclined to think that the market has overreacted, but things are so volatile that in the short term anything could happen. It might make sense to move some money into one of these bank loan funds, but I wouldn't bet the farm on them.
trumps-fiscal-policy-may-have-lessons-for-britain/
The full article may require free subscription, but the comment link is worth a free look.
The post-election narrative that's been helping drive this phase of rate increases is based on assumptions that may or may not play out. But of course there might be another shakeup after a Dec Fed rate bump and a consensus projection of more.
PTIAX in particular has held up pretty well considering; if you really want to do a protective sell based on more rate increases, I'd reduce GIBLX first, as it's typically got more rate sensitivity.
On floaters, I've been pairing a higher yielding cef and a safer oef, GIFPX, but for someone who hasn't got any exposure now, I'd say look at the ytd gains and invest accordingly - they've been doing well for more of the year than just recently.
https://wellscap.com/pdf/emp/20161031.pdf
I was caught off-guard a little bit by the accelerated rise in the 10-year. I agree that it is probably a bit of an over-reaction, BUT, the trend is still probably up, albeit not in a straight line.
What happens if the FED does move in Dec. How much of this rate move is baked-in anticipating the Dec. rate hike?
That is one reason why I am contemplating moving some of my monies into a BL fund.
Any further thoughts, ideas, suggestions are very welcome; please continue the conversation!
FYI, I too hold MAPIX and a little DEM, which I am holding on to, but NOT adding to at this point. Any comments or thoughts?
Thank you, Matt
You're not the only one. Suspect T. Rowe got caught a bit flat-footed. I own several of their conservative funds which have dramatically underperformed relative to my funds at Dodge & Cox and Oakmark the past week. Suspect T. Rowe was positioned for something different than what occurred. Three of their lower-risk funds (which I own) have underperformed noticeably since Nov. 8: PRWCX, RPGAX and TRRIX.
Some of this relates to bond holdings. (RPGAX in particular is global). More generally, I suspect T. Rowe has been expecting slower growth and constrained government spending and was so positioned in these funds. By comparison, Dodge & Cox (DODBX) is heavily weighted towards financials which have benefitted from the prospect of higher rates and inflation (and likely repeal of Dodd-Frank). And - just a guess - OAKBX probably benefitted from its long-time toe in the water exposure to drillers and energy. Also - they shed most long-term government bonds 2-3 years ago and have remained largely short-duration.
Sorry: No advice here. But folks have served-up some good ideas. Concur with you that the reaction is probably overdone - but that long-term the trend in rates is higher. FWIW: I'd be very surprised if Yellen is still Fed Chair a year from now. Anything's possible. (Maybe Rudi - if he doesn't take the Secretary of State job? ...
Below is a link, although a few months old, of one of the better articles I have seen on the floating rate/bank loan sector. Note how the 3 month LIBOR rate historically moves lockstep with the Fed funds rate.
https://www.lordabbett.com/en/perspectives/marketview/floating-rate-no-need-to-wait-libor-day.html
The past year saw very big
changes for both the Fund and for fixed-income markets. Fund assets grew more than four times going from $164.37
million to $688.60 million during the year. Managing that growth and maintaining desired allocations occupied most of the
management team’s time and attention
As this is being written, we still believe the tax-exempt market is attractive, but that can change quickly, and good
opportunities can be difficult to find even when we like the market. Thus, it is difficult to say whether allocations to tax exempts
will increase or decrease.
Our current allocation to commercial mortgage-backed securities (CMBS) (8.40%) was put in place after bringing on a
Commercial Real Estate Credit specialist with fifteen years of experience.
As a total return bond fund, we seek to position ourselves in the most undervalued fixed-income securities we can find
consistent with the need for proper diversification and liquidity. To identify such opportunities, we find scenario analysis
(over roughly a three-year investment horizon) to be more valuable than rate or market forecasting
http://ptiafunds.com/documents/ptam-annual-report.pdf
http://blogs.barrons.com/incomeinvesting/2016/11/16/why-floating-rate-loans-may-not-rise-in-price-when-rates-do/?mod=BOL_hp_blog_ii
http://www.mutualfundobserver.com/discuss/discussion/29877/the-scariest-chart-for-bond-yields#latest
It's been badgered to death here and elsewhere. Written about. Argued over dozens of times. Hell, I remember similar warnings and discussions back in the days of Fund Alarm. And ya know what? Rates kept falling.
So to say someone should have seen last week's sudden turn coming is a bit disingenuous.
DH, I have to agree with Hank; I'm not sure why you believe I and others should known that the 10-year was going to rise from 1.78 to 2.24 in just a handful of days, now. I'm not surprised rates are moving up; just the recent velocity.
Junkster, Thanks for the articles (I could not get to the Barron's article though). The Lord Abbett article seems to make the case for "diversifying" your portfolio with BL. As they also offer "attractive income" in a variety of interest rate environments and attractive risk-adjusted returns. Agreed, I do not think they are a "panacea" for higher rates, just another alternative.
In fact, the article appears to endorse, "this may be the time to invest" in BL. Did I misinterpret the conclusion?
JoJo26, thank you for your advice and thoughts. In general, I agree with you 100%; I'm not making wholesale changes or moving every bond holding to BL, just diversifying a bit because I'm beginning to believe the guru's that claim the decade's-long bull market may be coming to an end, albeit, hopefully slowly. We may just be "normalizing", whatever that means.
Please keep the discussion going! Matt
Reiterating what I wrote above, what matters is not what's in the rear view mirror, but what one expects going forward. If further changes in rates are moderate (albeit volatile), then one can get modest positive returns going forward without taking on additional credit risk.
One of those risks is linked with interest risk, because if rates do rise quickly that can be detrimental to businesses and thus trigger defaults. On the other hand rates can rise is response to an improving economy. In that case, risk of defaults goes down.
Why take on duration risk? Because the higher yield (especially now that rates have risen) can mitigate some of that risk. Following the suggestion of using short duration funds, I ran a second screen for funds yielding over 4% (TTM) having duration under 1.5%. Just 38 funds showed up, of which over half (20) were bank loan funds.
Five were junk bonds. Most of the rest were "nontraditional", meaning almost anything. There was also one multisector bond - RSIVX. I'm sure several people here can comment on that option.
Personally, my feeling is that in uncertain times don't just do something, stand there. Especially if you have built a well diversified portfolio.
Money quote: "A diverse portfolio of floating-rate loans should perform well when the economy is recovering and credit spreads are tightening."
Typically, they're not equivalent to junk corporates, as you sometimes hear/read: generally they have lower yields than junk corps, are higher in the capital structure, are backed by collateral, have lower default rates, and have higher recovery rates when they do default. (The Inv'pedia piece doesn't mention lower default rates that I can find, but several other sources I've read cite lower default rates as an advantage over junk corps.)
They may be overbought now, though, so even a temporary reversal in rates could be a problem. I don't think I'd be buying a significant stake at this point - probably would put new credit-FI $ into a tried and true, more all-weather option like Pimco Income - which pays out a higher yield than FRs now anyway.
As to floating rate funds, I think it is too risky to loan money to companies with bad credit who cannot float conventional bonds, and I wouldnt count on receiving anything in the event of default. I looked at the funds mentioned by Bob C. but three of these are unavailable to me at Charles Schwab, being for "institutional only" (LASYX, BSIIX and LLSYX). For the other 2, it looks like the OSTIX bonds are poor credit and thus too risky for me, and PONDX uses leverage and is thus high risk (see the result for these funds 2008, which could happen again.)
Joe
You can find retail share classes of these funds in Schwab OneSource: LABAX is there, BASIX is offered, and LALDX is open as well.
Remember, BobC is a professional. Don't try his share classes at home.
Thanks for the leverage note on PONDX. Its a good fund, well managed. But I remember having taken a look at it and noticing something. I'd forgotten what that something was. Here's a M* thread on the fund's risks (w/contributions by Sam Lee).
I had a large position in FFHRX in May 2015 after which it lost 9% in the next nine months, souring me on BL funds for a while
Kiplinger's Income Newsletter portfolio ( widely diversified with MLPs, Taxable and Muni Bond Funds, Dividend stocks) has had an income return of about 16 % since 1/1/2014 (about 6% a year) but the principal has declined 5% in that time so a retiree would see their nest egg shrink (and it was far worse in March before the current rebound in energy!)
A quick M* chart from May 2015 to March 2016 of some of the above funds shows losses of up to 8% ( RSIVX ), and of course those funds with the higher yields lost the most. PONDX somehow sailed right thru, but the leverage is a huge concern.
No one has mentioned ZEOIX which held up nicely but still pays 2.4% . Maybe better to accept a lower income stream (if you can) than to see your money melt away as rates rise.
There is no such thing as a free lunch
Take a look at emerging markets high yield funds. The US$ is at a multiyear high so these funds have taken a hit and will do well when the US$ weakens. Until then you will get a good interest rate.
Jeffery Gundlach in Tue's Webcast did not "pound the table" predicting a higher US $$$$ but stated it would not surprise him to see 120 in the next two years...Also,"don't over analyse" and "keep your seatbelts fastened" Earlier he said he was not interested in becoming US Treasurer.in effect saying " I want to remain brutally honest and politicians are seldom if ever that. ." Closed End Fund Webcast Nov 8th https://event.webcasts.com/viewer/event.jsp?ei=1085775
BUSINESS NEWS | Thu Nov 17, 2016 | 10:56pm EST By Hideyuki Sano | TOKYO Reuters
Rising U.S. yields help dollar to 13-1/2 year high
..rising U.S. bond yields carried the dollar to a more than 13-1/2 year high against a
basket of major currencies, fueled by expectations that President-elect Donald Trump's policies will lead to higher interest rates.
The dollar's index against a basket of six major currencies rose above its "double top" touched in March and December of 2015. The index now stands at its highest level since April 2003. "Double top" is a technical analysis term describing a currency (or other liquid asset) rising to a high, falling, and then rising again to the same level. Breaking the double top is often seen as a bullish sign by technical analysts.
A rising dollar is particularly a problem for some emerging economies that could see capital outflows if investors shift more funds to the United States.
http://www.reuters.com/article/us-global-markets-idUSKBN13D040?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+reuters/businessNews+(Business+News)
http://cdn.tradingeconomics.com/charts/united-states-currency.png?s=dxy&v=201611180455r&d1=20110101&d2=20161231
http://www.tradingeconomics.com/united-states/currency
I do not want to get caught off-guard again. You can bet there will be another leg-up or two in the coming year, but when?
Thanks for sharing!!