In February of 2016, I wrote an article on floating rate funds. I was curious to see how my predication panned out and thought I’d cover them again.
Floating rate funds hold short-term corporate debt. In good times, they have a steady net asset value and a high yield. Financial advisors incorrectly sell them as money market funds. I once heard a fund wholesaler tell a group of financial advisors that they are similar to money markets. They are not. Sometimes the debt that these funds hold can be risky. I saw a statement back in 2008 that belonged to a person who invested $1 million into a floating rate fund at his advisor's behest. If memory serves me correctly, the fund was down over 50%. Remember, this is safe money, not equities.
The fund that I concentrated on in the first article was the Fidelity Advisor Floating Rate High Income Fund (FFRHX). According to Yahoo, the expense is 0.69%, the thirty-day yield is 4.43%, and there are $12.6 billion in assets. When I first wrote on the fund, the fees were 0.98%, even though they are still too high. Ironically, I wrote on the fund in the same month that it was trading at its nadir, $8.95. It’s now trading at $9.54. The fund had invested in some pretty speculative bonds, including Peabody Coal, Pacific Drilling, and Seadrill.
Now, the fund has 35.8% BB rated debt and 47.3% B. That’s a lot of junk debt in my opinion. The weighted average maturity is five years and the duration is .22. That means that a 1% rise in interest rates will cause a 0.22% drop in the fund value. Not bad based upon interest rate risk.
The largest holding is Caesars Entertainment (CZR). Caesars has $1.56 billion in cash and $472 million in receivables to $325 million in payables and $9 billion in debt. Not too bad for a floating rate fund. The next largest holding is Albertsons (ACI). Moody’s has the debt rated B1 which is junk. The analyst noted that the grocery business is competitive (no kidding!) and that debt to EBITDA deteriorated from 6.4 to 7.1 at the end of last year. Looking further down the holdings list, I see that the fund has $40 million in a J.C. Penney (JCP) bond that matures in 2023. I don’t see what that particular bond is yielding but other J.C. Penney debt with similar maturities are yielding over 20%. No thanks.
I must say that the bonds in here are not too bad, but nevertheless, they are high yield and we may be coming to the end of the good times. You don’t want to be in a fund like this when things get hard. Junk bonds trade like stocks in bad times and this fund is chock full of junk.
A subscriber who holds the Eaton Vance Floating-Rate Advantage Fund (EIFAX) messaged me so we’ll take a look at that fund too. The fund has over $10 billion in assets, the fees are 1.04%, and the yield is 4.47%. The fees are exorbitant. 1% is even getting expensive for equity funds. The largest holding is Bausch Health (BHC), which I like. We own the equity. The next largest holding is JBS Foods (JBS), which we briefly held last year. JBS is one of the largest food companies in the world. Burger King is another large holding. The ten-year return on the I shares is 6.9%. That’s outstanding. Morningstar rates the fund as five stars, not that I put much faith into Morningstar’s rating system.
In 2008, the Eaton Vance fund dropped from $10.46 in May to $6.41 in December. That’s a hit for a “safe” fund. Of course, 2008 was pretty bad. The ten-year numbers I gave you in the last paragraph account for the fact that you were getting in close to the ten-year low.
Floating rate funds have done well over the last ten years, just like everything else. I’d be leery of holding them at this point, but there can be a time and place when the stars align. I think the fees charged by these two funds are exorbitant. I’d rather own individual issues and choose your own risk. You can get similar maturities with a lot less risk even though you give up yield. That’s what I’d suggest if you have the time to buy individual bonds.
