It's Barron's-Roundtable season and in the second installment, one of the panelists who only picks mutual funds mentioned the Aristotle Floating Rate Income Fund (PLFDX). I've never heard of the fund but since the fund company isn't a behemoth like Franklin of Vanguard I was curious.
I've maintained floating rate exposure for a long time, really a long time. I bought iShares Floating Rate ETF (FLOT) for clients, I bet it was more than ten years ago, as part my wanting to avoid interest rate risk. Back then the yield was much lower, it is now in the fives and price-wise it's pretty much a horizontal line on the chart. When the old incarnation of our firm went down due to partner malfeasance (I was never a partner), I took over some accounts that owned the WisdomTree Floating Rate ETF (USFR).
FLOT and USFR are almost interchangeable. FLOT has done a little better but USFR has even less volatility. I've been very happy with holding FLOT and now USFR but it occurred to me that with all of the portfolio theory work we've done on the blog for the last couple of years, I don't think we've done anything with this type of floating rate, as opposed to leveraged loans which we have studied in a few posts.
Below compares FLOT with client and personal holding Merger Fund (MERIX) and Calamos Market Neutral Fund (CMNIX) which is another type of alternative strategy fund that pretty much also looks like a horizontal like that tilts upward.
FLOT is not an alternative strategy but I wanted to see what it looked like compared to a couple of alts. Relative to things that don't fluctuation much, FLOT doesn't really look like the two alts. The attributes of no volatility and a yield commensurate with paying rates is something I want in portfolios, I think FLOT's chart is what people hope that bonds will do.
So now lets remove FLOT in the next chart and replace it with the Aristotle fund mentioned above.
PLFDX looks a lot like the two alts in terms of total return and standard deviation. When I see something like this, a couple of things come to mind. Either PLFDX is far superior somehow or it's not really a proxy for, in this case, floating rate. Maybe the fund can venture a little further out than just floating rate. I have no idea.
A quick visit then to the fund's website and the first thing I learn is that as an advisor, I should probably use symbol PLFRX. Circling back, Aristotle has a 5 star rating from Morningstar and Yahoo Finance says the yield is 8.88%.
Sure enough, despite the name including 'floating rate' it actually a leveraged loan fund which is a different exposure. Leveraged loans are sort of high yield debt but loans are higher on the capital structure than bonds and so are by definition less risky than bonds. Because the yield resets (usually) every three months leveraged loans are viewed as short duration assets.
I modeled out the following.
Portfolio 2 is the Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 portfolio. BTAL is a client and personal holding.
The lower volatility from Aristotle (I stuck with PLFDX because it goes back further) and FLOT compared to the benchmark iShares Aggregate Bond ETF (AGG) and more importantly the much shorter duration of PLFDX and FLOT allows for increasing the equity allocation to 65% which improves returns (not a surprise) versus 60/40 but also provides lower volatility than 60/40 VBAIX.
Fifteen percent is more than I would put into a single fixed income sector other than short term treasuries but I believe the same effect that we captured above can be created with several completely different strategy funds. Obviously I am a believer in merger arbitrage. Convertible arbitrage interests me, Fidelity just launched a fund in this space, but I have not allocated to that one and there are others still to help defray the risk of going too heavy into a single strategy.
If like me, you don't want a lot of volatility from the fixed income portion of your portfolio, these are the places to look.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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