Floating rate income funds are not automatic high yielding replacements for a portfolio’s low yielding core bond or cash holding and have a myriad of risks that may impact a portfolio’s ability to meet an investor’s income and or capital needs over the duration of their lifetimes, especially during risk events.
Yet, these investments are apparently “sold” with next to no disclosure over the risks, or the complete nature, of the investments and no apparent guidance over allocation and risk management imperatives. Too much emphasis is placed on a couple of simple and easy reasons for buying them – yield and reduced interest rate risk.
Floating-rate bonds differ from traditional bonds in several respects that we discuss next—notably, interest rate terms, capital-structure seniority, and borrower credit quality—with each contributing to the asset class’s unique risk–return profile – From Vanguard’s A primer on floating-rate bond funds.
There has been a lot of comment recently about Floating Rate Income funds. More recently we have Tom Bradley’ Fixed Income’s New Reality (Live) discussion over the credit and liquidity risks of Floating Rate investments as well as their role in the portfolio. There has of course been a lot of press about these vehicles, and most of this coverage with few exceptions barely scratches below the surface of the issue.
For the moment I am going to introduce excerpts from a Vanguard report (A primer on floating-rate bond funds) into these investment vehicles and in further posts discuss some of my concerns over the way they are likely being sold in the market place: