Protected Principal Retirement Strategy: 'Float' Like A Butterfly

 |  Includes: AFT, PHD, VTA
by: Akaralph

In my article of February 26, (here) I touched on the subject of defensive investing in the event of a severe correction or full-blown bear market. In that article I addressed four closed-end funds and two mutual funds that had performed well in past bear markets - funds that I would consider for the Protected Principal Retirement Strategy portfolio should the pins be knocked out from under the current bull market.

This morning, I happened across a Wall Street Journal article (here) that appeared on Yahoo Finance addressing how investors might prepare for coming interest rate hikes. The article addresses floating rate investment alternatives - the premise being that as the Fed increases interest rates, the dividends paid by floating rate instruments will also increase.

Having had some experience owning a few floating rate closed-end funds years ago, I spent the balance of the morning re-checking a number of them. The following is what my research turned up.

Floating Rate Closed-End Funds

There are at least nine decent quality floating rate closed-end funds [CEFs]. You can research any of them on for further information. However, they seem to be popular investments, as many folks appear to be loading up on them in advance of future interest rate increases. This is borne out by the fact that all presently sport premiums to their net asset value [NAV]. Here is the list:

  • Blackstone/GSO Senior Floating Rate Fund (NYSE:BSL)
  • Eaton Vance Floating Rate Income (NYSE:EFT)
  • ING Prime Rate Trust (NYSE:PPR)
  • Invesco VK Dynamic Credit Opportunities (NYSE:VTA)
  • Invesco VK Senior Income (NYSE:VVR)
  • Eaton Vance Senior Floating Rate Fund (NYSE:EFR)
  • First Trust Senior Floating Rate Income II (NYSE:FCT)
  • Pioneer Floating Rate Trust (NYSE:PHD)
  • Apollo Senior Floating Rate Fund (NYSE:AFT)

I'm certain that there are more of these - will leave that to my readers to uncover.

Since all of the above are presently selling at premiums, I checked to see when each last sold at a discount to NAV. BSL, EFT, PPR, EFR, and FCT last sold at a discount in November 2012. PHD and AFT last sold at discounts in late December 2012. VVR sold at a discount in January 2013, and VTA around the beginning of this February. If one is interested in the floating rate CEFs, I suggest checking the premium/discount levels weekly, at minimum.

Since I would be willing to consider the addition of floating rate vehicles to the Protected Principal Retirement Strategy portfolio at small premiums, I selected three that would be the most likely candidates for further discussion. These presently have the smallest premium to NAV of the nine that I have identified.

Invesco VK Dynamic Credit Opportunities

VTA presently sells at only a one percent premium to NAV. It is a monthly dividend payer (love that), paying $.075/Month for a current yield of 6.8 percent. Management fees are 1.58 percent, and all distributions are categorized as income.

During the last bear market (10/9/2007 - 3/9/2009) the monthly dividend ranged between $.1517 and $.1005.

The portfolio consists primarily of loans (78 percent), and 81 percent of its holdings are in the United States. Seventy-four percent of its loans are classified as "B" or "BB". The fund's price increased by 27 percent in 2012, and is up over eight percent thus far in 2013.

Pioneer Floating Rate Trust

Selling at a current premium to NAV of 4.79 percent, PHD also pays a monthly dividend of $.075. The yield is presently 6.53 percent.

During the bear market from 10/9/2007 to 3/9/2009, monthly dividends ranged from $.1450 and $.115.

Management fees are 1.11 percent, and all dividends are income. Loans comprise 90 percent of its portfolio, which is 100 percent invested in the U.S. About 92 percent of its positions are classified as "B", "BB", and "BBB". The fund's price was up 14.2 percent in 2012, and is presently up 4.5 percent year to date.

Apollo Senior Floating Rate Fund

Apollo is presently at a 5.14 percent premium to NAV. It currently pays a monthly dividend of $.105 for a yield of 6.28 percent.

Management fees are 1.54 percent and dividends are classified as income. Eighty-seven percent of its positions are loans, and it is 100 percent invested in the U.S. Eighty-eight percent of loans are rated as "B' or "BB".

During the 10/9/2007 to 3/09/2009 bear market, Apollo was not publicly traded.


At this time I do not foresee interest rates clicking up in the next few months; however, the floating rate funds are usually purchased by astute investors in advance of interest rate hikes, so keeping a close eye on them is warranted. I would not neglect the other six that I mention, but do not cover in detail in this article. Any significant change from a premium to a discount should get your attention.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. This article does not constitute either a buy or sell recommendation for any of the closed-end funds mentioned.