American Beacon Sound Point Floating Rate Income Fund

wxman123

What are your thoughts on this one? I'm always skeptical of anything to good to be true...but this fund has an exceptionally narrow 52-week trading range of 10.29 to 10.36, yields 4.63%, a long and successful run before the Sound Point Fund was picked up by American Beacon, and is up 1.83% YTD. Floaters are usually fairly volatile but this fund is run to be low vol, and has lived up to that promise. With rising rate expectations, this would appear to be a holy grail, but alas there are few such beasts. Where does the danger lurk...or should we be buying with both fists.
PS. Pimco Income has been my go to for years and is still my mainstay in the bond space, but I just can't believe that its significant out performance won't mean revert at some point and so I will not increase my already full position.

AndyJ

I own it, and agree with one M* poster who's expressed the opinion that it's the only bank loan fund that might make sense to buy and hold.

However, and you knew there'd be one, it's getting much better known now, AUM is climbing, and it's unclear how their process will fare (briefly, fishing among less followed securities; their materials explain it well), the more investor $ they have to run.

TheShadow

I own It also. Bought it through Scottrade before they deemed it an Advisor Class fund and raised the initial minimums resulting from American Beacon acquiring the fund. Be interested in what other brokerage is offering it to retail customers for low minimums, if any.

Fund has talked about by many on different boards.

AndyJ

Shadow, there's a relatively new investor share class, SPFPX, that's available at Fidelity NTF and low-min. According to the M* purchase page, it looks to be similarly available at many/most of the commonly-used brokerages.

TheShadow

@AndyJ

Thanks for the info. I still have SPFLX with TDA, but I am not sure if I can add to my existing position. May look at the investor class as an option.

wxman123

The thing that gets me is the low vol, the NAV hardly ever moves, even on huge move days for other floating rate funds. It makes me wonder if the underlying securities are not valued daily.

LewisBraham

@Wxman123
Read pages 28-30 of the semiannual report:
prospectus-express.newriver.com/summary.asp?doctype=semi&clientid=ambeacpdfll&fundid=024525313
Floating rate loans are similar in their pricing to the subprime debt for the IOFAX fund discussed in another thread. They are mainly Level 2 securities so pricing can be tricky and involves what is known as a fair value system based on other inputs such as how other similar securities might be trading that day. During periods of stress, these kinds of securities can become much more difficult to price.

carew388

Would like to hear from @Junkster about this fund, considering that's he's had considerable experience with high-yield and floating rate bond funds.

Junkster

https://www.guggenheimpartners.com/perspectives/sector-views/q2-2018-high-yield-and-bank-loan-outlook

I have tried to stay out of this one. We have discussed ad nauseum this sector on the Morningstar forums. Everyone and their mother is camped out in this category and for good reasons - rising short term/3 month Libor rates. It has been one of the few beacons in Bondland in 2018. But a lot can go wrong especially when investors think they are in a “sure thing”.

For example a serious rout in stocks much more than what we saw this past February would also lead to a rout in junk corporates. That would bleed over to floating rates as after all, they are junk credits. Check out August 2015 through early February for a preview. I doubt in my lifetime there will be another credit crisis but in that crisis floating rates performed even worse than junk corporates with somevfubdscdown over 30%. Another threat would be the Fed pausing on rate hikes if stocks have a major decline and/or there is some unexpected decline in the growth of the economy.

The above link is a report from a well respected firm for those into fundamentals. Haven’t read the entire report but the default rate for floating rate is already rising albeit below historical norms. It is actually higher than the high yield default rate. Covenant lite issuance is at record highs, not good whenever this long running post credit crisis cycle turns, Still, my largest % holding is in this category with EIFAX which I have mentioned here over the past many months. But my eyes are wide open. The time to have been a player here was 2016 when many floating rate funds had double digit returns and beat the S&P. You can check the archives for my activity there then.
I always wonder why so many suddenly see the light years after the fact. Entry now while maybe not the worse bond investment out there is certainly more in the late innings than the early. You better hope for continued economic vigor and in turn the Fed continuing aggressive.

JoeD

Junkster said:

I always wonder why so many suddenly see the light years after the fact. Entry now while maybe not the worse bond investment out there is certainly more in the late innings than the early. You better hope for continued economic vigor and in turn the Fed continuing aggressive.

For "less-sophisticated" investors like myself, the move to Floating Rate/Bank Loan funds became a no-brainer as the more common bond fund vehicles (i.e. PONAX, PTIAX) have recently stopped generating positive returns (while interest rates climb). There do not appear to be many other great options in the debt universe that can benefit from such a (rising) rate environment.

Clearly these are not "forever" funds.

carew388

@ Junkster thanks for your insights. Looks like the "easy money" has already been made in this sector!

willmatt72

I own it as well, and have been surprised at its low volatility. The NAV doesn't seem to move much at all, one way or the other.

msf

> But a lot can go wrong especially when investors think they are in a “sure thing”.

In a nutshell, that's what concerns me about bonds other than vanilla bonds (investment grade corporate, treasuries). They are fine, often for long periods of time (increasing the belief that they're "sure things"), until they're not. Then declines can come fast and steep. These are not your father's bond funds.

@Junkster, thanks for the link. A lot to unpack.

Speaking of your father's bond funds, it's worth taking a look at Vanguard bond funds to better understand what Level 2 means.

Virtually every bond whether it is a AAA rated corporate or a junk rated bank loan is level 2 or below. That's because unlike stocks, unique bonds usually don't trade that frequently. So instead of pricing from actual market trades, estimates may done by "comps" as in real estate. That's level 2.

Here's the latest Vanguard bond index fund semiannual report. Excluding cash equivalents and futures contracts, the breakdown of the Vanguard funds by level are:

Short Term Treasury (p 22) - US Government Obligations: 100% level 2
Intermediate Term Treasury (p 36) - US Government Obligations: 100% level 2
Long Term Treasury (p 51) - US Government Obligations: 100% level 2

Short Term Corporate (p 67) -
US Government Obligations: 100% level 2
Corporate Bonds: 99.9% level 2, 0.1% level 3
Taxable Munis: 100% level 2

Intermediate Term Corporate (p. 83) -
US Government Obligations: 100% level 2
Corporate Bonds: 99.9% level 2, 0.1% level 3

Long Term Corporate (p 100) -
Corporate Bonds: 99.97% level 2, 0.03% level 3
Taxable Munis: 100% level 2

Mortgage Backed Securities (p 116) -
US Government and Agency Obligations: 100% level 2

LewisBraham

@MSF Vanguard may categorize Treasuries as level 2, but I don't know a single money manager who would say they need to fair value Treasuries and can't get a market quote almost instantaneously on the run of the mill ones. By contrast, for a long time floating rate loans were so illiquid and difficult to price they weren't even offered in open end mutual funds which provide daily liquidity. You had to buy them in either a closed-end format or in interval funds that only allowed a small percentage of quarterly redemptions. That's changed somewhat over time as the market got deeper and there are certain large issuers now that you find in open end funds and ETFs. But no way Jose you can say they are as easy to price as Treasuries or popular investment grade corporate bonds or tradional agency bonds.

msf

All I'm saying is that one can't infer that bank loans are harder to price than treasuries from the fact that the former are classified as level 2. Certainly pricing them is more difficult, just as investment grade corporates are harder to price than Treasuries. But you won't get that from their pricing level. Right conclusion, wrong evidence.

Quoting from the Vanguard report: "Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities."

You say you don't like Vanguard; you say it's too conservative. Have I got a deal for you
How about Fidelity? The annual report for its Limited Term Government Fund classifies all its holdings (again excluding cash equivalents) as level 2, including both US and foreign government and government agency obligations, US government agency mortgage securities, CMOs, commercial mortgage securities, and purchased "swaptions".

Or let's get wild and crazy, and check out PIMCO. In PIMIX's semiannual report we finally find some level 1 bonds. But they're not treasuries - all the US government obligations and treasuries are level 2.

0.01% of banking and finance bonds are level 1, while 11% are level 3, showing that sometimes bank loans are rated at level 3. (All the financial stocks held by the fund are also rated level 3.)

0.3% of corporate industrial bonds are level 1, while 0.14% are level 3.

There are a variety of other categories of bonds and stocks with some rated level 3.


JP Morgan gives a clue as to why all these bonds show up as level 2 or lower:

"J.P. Morgan has reserved the definition of ‘quoted prices in active markets’ to strictly be applied to exchange trade equity and derivative securities. Fixed income prices provided by a vendor or broker/dealer are classified as a Level 2. This decision is based on our analysis which found that most fixed income securities are priced using an evaluated price provided by an independent pricing vendor or broker/dealer."

larryB

I want to thank the contributors to this excellent and most helpful discussion. Links are links but the exchange of ideas help all of us. It's just my opinion but a half a dozen discussions are worth more than a thousand links.