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FRA: Floating Rate Fund Worth Taking A Look At


  • Debt investments with floating rates, typically funds that focus on senior loan investments, should do well when rates rise.
  • We know that the next logical step for interest rates is for the Fed to increase rates, this should happen over the next couple of years.
  • FRA is at an attractive discount and should benefit from increased rates as it will be among the first to start earning a higher income.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »
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Written by Nick Ackerman, co-produced by Stanford Chemist

BlackRock Floating Rate Income Strategies (NYSE:FRA) is a pretty straightforward fund. As its name suggests, it targets debt investments that have floating rates. Therefore, when the Fed does decide to start increasing rates as the

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This article was written by

Nick Ackerman profile picture

Nick Ackerman is a former financial advisor using his experience to provide coverage on closed-end funds and exchange-traded funds. Nick has previously held Series 7 and Series 66 licenses and has been investing personally for over 14 years.

He contributes to the investing group CEF/ETF Income Laboratory along with leader Stanford Chemist, and Juan de la Hoz and Dividend Seeker. They help members benefit from income and arbitrage strategies in CEFs and ETFs by providing expert-level research. The service includes: managed portfolios targeting safe 8%+ yields, actionable income and arbitrage recommendations, in-depth analysis of CEFs and ETFs, and a friendly community of over a thousand members looking for the best income ideas. These are geared towards both active and passive investors. The vast majority of their holdings are also monthly-payers, which is great for faster compounding as well as smoothing income streams. Learn More.

Analyst’s Disclosure: I/we 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 was originally published to the members of the CEF/ETF Income Laboratory July 1st, 2021.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (33)

Pimco funds also loosing premiums. Good buys long term.
Nick Ackerman profile picture
@integritycoatings indeed! I added to PDO recently.
Well, higher rates are here, and FRA is getting crushed, just like BGT. Thesis does not seem to hold in this tricky high inflation environment.

Also, FRA and BGT are very very similar products. Appear nearly identical in construction. Is there any benefit to one versus the other?
Nick Ackerman profile picture
@investinwood I don't see a benefit from one to the other.

Getting crushed is also subjective. Investors are selling the funds off heavily. The managers can't control that. However, I would note that the total NAV returns YTD are down just 3.09% for FRA and 3.16% for BGT. I'd say they are doing incredibly well...if only other investors wouldn't push them into some extreme discounts is another matter.
Nick Ackerman profile picture
@investinwood actually, I just realized this is my old FRA article. Here is an updated piece where I talk about exactly what is going on. seekingalpha.com/...
Is PHK another shorter duration fund to consider at this time? At a premium but not as high as some Pimco.
Nick Ackerman profile picture
@integritycoatings looks like a duration of 5.06 - that is quite high. I don't see it as competitive to senior loan funds. FRA has a duration of 0.28 at this time, for context.
@Nick Ackerman what about EFT or EFR ? Looking for other short duration floaters. JFR at 0.33 looks to be very similar and a discount
Nick Ackerman profile picture
@integritycoatings I did a screening of senior loan funds somewhat recently. I shared some ideas on the funds I'd be looking at to add. That being said, I am a fan of Eaton Vance so I think those other funds could be taken under consideration too - even if they aren't as discounted. seekingalpha.com/...
Thanks for this article. These could be interesting at some point, but right now they're both expensive on a relative basis (FRA has a z-score of 1.87, and BGT is even worse at 2.10). But I like BlackRock funds, and I'll be keeping an eye on these.
Nick Ackerman profile picture
@toromi thank you for reading and sharing your thoughts!
NV_GARY profile picture
Single issue F-2-Fs are preferable- for me.
Nick Ackerman profile picture
@NV_GARY thank you for sharing your thoughts!
No_Bravo_Sierra profile picture
@Nick Ackerman Your thoughts on BGT? Also floating rate
Nick Ackerman profile picture
@No_Bravo_Sierra I discussed BGT in this article. It looks like it just comes out slightly ahead of FRA in terms of performance. Over both the long term and shorter term. It also has a similar discount. And actually, when I did this article originally, they had the same exact distribution rate as well. I believe both FRA and BGT should continue to perform quite similarly.
@Nick Ackerman What do you think of JFR in this space?
Nick Ackerman profile picture
@wbrad90 here were my last comments on JFR. seekingalpha.com/...

In that article, I screened all the senior loan space. In January, I did the same and JFR also appeared on the list of screenings. seekingalpha.com/...

I've wanted to screen senior loan funds again soon, as I've done in the past. Hopefully, I'll be able to get something together again soon! As I do feel it is an important area to be watching for now.
sacking profile picture
Thank you for the review. I haven't followed FRA yet. I do have BLW and XFLT in my portfolio. How do you see these compare to FRA?
Nick Ackerman profile picture
@sacking thank you for reading! FRA is a floating rate fund that invests mostly in senior loans. BLW takes a multi-sector bond fund approach; meaning they invest in different debt instruments such as high yield, senior loans and investment grade. This means duration can be a bit higher, but overall seems relatively low too.

For XFLT, that is a hybrid fund that invests in senior loans and CLOs. CLOs are essentially pooled senior loan funds. However, the big difference is that within the CLO are different tranches. Depending on where the holdings are within the tranche, they can act very differently. For XFLT, they are free to hold debt and equity CLOs. This can make them quite volatile overall - but relatively speaking That means, XFLT should have a low effective duration as well - though it doesn't seem as though they report it. At least not where I can find it.
I'm a little concerned about the fund's objective:

"The Fund is a diversified closed-end investment management company that seeks a high level of current income with the secondary objective of preservation of capital."

I'd prefer a primary objective of income while preserving capital! The current objective could be met by return of capital, until it is all gone.
Nick Ackerman profile picture
@jeuber that is understandable! Thank you for sharing your input.
I would also consider "HFRO", 8.5% distribution.
Nick Ackerman profile picture
@shogan thank you for your input! However, I would absolutely not. It is hardly a senior loan fund if you look at the holdings and portfolio allocations. Their highest exposure is to real estate. www.highlandfunds.com/...

They are also looking to convert to a diversified holding company, instead of staying a regulated investment company. www.hfroconversion.com/...

If I can be honest, I see HFRO as one of the best examples of being a badly managed CEF.

That being said, of course, I hope it is working out for you!
@Nick Ackerman I sold on the conversion news.
Nick Ackerman profile picture
@eric litvak In my opinion, it is a move to get away from tighter regulations than they have in the RIC structure.
Thanks for the analysis and recommendation. Any thoughts on comparing FFRHX - Fidelity’s High Rate Floating Income fund? This seems to have lower credit quality holdings?
Nick Ackerman profile picture
@Tawm interesting - I am not familiar with that mutual fund. I think a main point is that FFRHX could be more appropriate for relatively conservative investors. This would be due to not operating with any leverage such as these CEFs do. Additionally, another factor to consider is you also won't get a discount when buying shares of FFRHX as you would with FRA when it trades below NAV.

Those are just the general points that I would consider when comparing CEFs and OEFs. Good luck and thank you for reading!
The leverage is insane to say the least
Nick Ackerman profile picture
@motto5448 welcome to closed-end funds!
Seatonmanagement profile picture
Intriguing. Maybe 100 shares of all 3 would be profitable.
Nick Ackerman profile picture
@Seatonmanagement indeed! This is part of my continued look into senior loan funds. I'm trying to find a few to add to my portfolio over the next couple of years - no rush as the Fed is content with current rates for a while.
SleepyInSeattle profile picture
@Nick Ackerman Thanks! - Long BGT and FRA.
I am up 12.88% on FRA (1/4 POSITION purchased mostly 09/28/2020 & later)
I am up 6.88% on BGT (FULL POSITION purchased 2019 or earlier).
Probably I don't need to hold both, but I do.
Steady variable income but not as much growth as some other CEFs I own.
I'll keep them for income and diversification.
Nick Ackerman profile picture
@SleepyInSeattle I don't believe it hurts to hold both either. I believe they are both great diversifiers in a portfolio. They will also be among the first the benefit when rates start to rise. Good luck and thank you for reading!
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