looking to increase fixed income; bank loan funds an option?

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looking to increase fixed income; bank loan funds an option?

Postby feh » Thu Jul 25, 2013 3:17 pm

I want to increase the percentage of fixed income in my portfolio (currently 25%). Ideally, I'd like to do this with future contributions, but the options in my 401K are fairly limited:

Allianz Gi High Yield Bond (.90)
Eaton Vance Floating Rate (1.02)

I don't want to buy any intermediate term bonds, as I may be selling these funds in a few years. Has anybody used a bank loan fund for fixed income purposes?

Thanks.
Last edited by feh on Thu Jul 25, 2013 9:40 pm, edited 1 time in total.
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Re: looking to increase fixed income

Postby DSInvestor » Thu Jul 25, 2013 3:31 pm

Those options have high expense ratios. Do you have any IRA accounts at Vanguard? Vanguard's bond funds have expense ratios of 0.10-0.20%. Vanguard has many short term bond funds to choose from if you're not comfortable with intermediate term bond funds.
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Re: looking to increase fixed income

Postby feh » Thu Jul 25, 2013 3:37 pm

DSInvestor wrote:Those options have high expense ratios. Do you have any IRA accounts at Vanguard? Vanguard's bond funds have expense ratios of 0.10-0.20%. Vanguard has many short term bond funds to choose from.


I have IRAs (at Fidelity) and am planning on throwing the annual max at fixed income in those accounts. I'd like to do the same with my 401K, unless these options are so bad I should divert money from 401K contributions to after-tax options like CDs and/or taxable accounts.
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Re: looking to increase fixed income

Postby billyt » Thu Jul 25, 2013 3:38 pm

I would not put money that I needed in a few years in anything but an FDIC insured savings or CD.
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Re: looking to increase fixed income; bank loan funds an opt

Postby feh » Thu Jul 25, 2013 9:44 pm

Has anybody considered bank loan funds? Are such investments considered fixed income?

There aren't any short term bond funds available in my 401K. The closest thing is Eaton Vance Floating Rate (EVBLX), which has an expense ratio of 1%.

My other option would be to reduce 401K contributions down to the match and use after-tax dollars to buy CDs or short-term bonds in my taxable account.

Thoughts?
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Re: looking to increase fixed income; bank loan funds an opt

Postby Jim180 » Thu Jul 25, 2013 10:57 pm

feh wrote:Has anybody considered bank loan funds? Are such investments considered fixed income?

Floating Rate Loan funds are considered fixed-income. The loans are to companies that are below investment- grade (junk). These funds tend to do well when interest rates are rising but frequently give back those gains once rates stop rising, so they are not something to just buy and hold. They also get hit hard by a economic downturn. As an example the fund you mention was (-30.5%) in 2008. I suppose a person could hold a small position in one of these funds to offset the interest rate risk of traditional bond funds, but because of the credit risk I would not hold a large position.
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Re: looking to increase fixed income; bank loan funds an opt

Postby feh » Fri Jul 26, 2013 7:46 am

Jim180 wrote:
feh wrote:Has anybody considered bank loan funds? Are such investments considered fixed income?

Floating Rate Loan funds are considered fixed-income. The loans are to companies that are below investment- grade (junk). These funds tend to do well when interest rates are rising but frequently give back those gains once rates stop rising, so they are not something to just buy and hold. They also get hit hard by a economic downturn. As an example the fund you mention was (-30.5%) in 2008. I suppose a person could hold a small position in one of these funds to offset the interest rate risk of traditional bond funds, but because of the credit risk I would not hold a large position.


Thanks.

What do you think is the max percentage of a portfolio that should be used for such a fund?
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Re: looking to increase fixed income; bank loan funds an opt

Postby DSInvestor » Fri Jul 26, 2013 7:49 am

feh wrote:My other option would be to reduce 401K contributions down to the match and use after-tax dollars to buy CDs or short-term bonds in my taxable account.


Here's something to consider if you want to keep the bonds in the tax advantaged accounts: You can buy all the bonds in the IRA space.
In 401k - all new money buys stock funds.
In IRA: - all new money buys short term bond fund. Also exchange 17.5K stocks for short term bonds in IRA.

These actions combined will be equivalent to directing all new contributions (17.5K + 5.5K) to bonds but you will have a much lower expense ratio on your bond holdings. Fidelity has some spartan short term bond funds with low expense ratios (0.20%).
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Re: looking to increase fixed income; bank loan funds an opt

Postby feh » Fri Jul 26, 2013 8:15 am

DSInvestor wrote:
feh wrote:My other option would be to reduce 401K contributions down to the match and use after-tax dollars to buy CDs or short-term bonds in my taxable account.


Here's something to consider if you want to keep the bonds in the tax advantaged accounts: You can buy all the bonds in the IRA space.
In 401k - all new money buys stock funds.
In IRA: - all new money buys short term bond fund. Also exchange 17.5K stocks for short term bonds in IRA.

These actions combined will be equivalent to directing all new contributions (17.5K + 5.5K) to bonds but you will have a much lower expense ratio on your bond holdings. Fidelity has some spartan short term bond funds with low expense ratios (0.20%).


Thank you. I was having similar thoughts yesterday about how to do this while keeping costs low; it helps a great deal to have it spelled out like this.

One small problem - can't contribute to IRAs this year due to income limits, but I'll be able to next year.
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Re: looking to increase fixed income; bank loan funds an opt

Postby Jim180 » Fri Jul 26, 2013 9:13 am

feh wrote:What do you think is the max percentage of a portfolio that should be used for such a fund?

Probably around 10%. They are basically just used as a hedge against higher interest rates.
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Bank Loan Funds ?

Postby Taylor Larimore » Fri Jul 26, 2013 9:53 am

feh wrote:I want to increase the percentage of fixed income in my portfolio (currently 25%). Ideally, I'd like to do this with future contributions, but the options in my 401K are fairly limited:

Allianz Gi High Yield Bond (.90)
Eaton Vance Floating Rate (1.02)

I don't want to buy any intermediate term bonds, as I may be selling these funds in a few years. Has anybody used a bank loan fund for fixed income purposes?

Thanks.

feh;

Morningstar is currently featuring this article:

Should You Consider Floating-Rate Bank Loans Today?

I hope it helps answer your question.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Bank Loan Funds ?

Postby feh » Fri Jul 26, 2013 10:08 am

Taylor Larimore wrote:Morningstar is currently featuring this article:

Should You Consider Floating-Rate Bank Loans Today?

I hope it helps answer your question.

Best wishes.
Taylor


Thanks Taylor.

I'm seriously considering incorporating such a fund in my portfolio. If my horizon was 10+ years, I'd just stick with intermediate bonds. However, I have a shorter horizon, and bank loans appear to be a decent hedge against rising interest rates.

I'm kind of surprised there isn't more chat about such funds on these forums, given all the angst over bonds.
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Re: looking to increase fixed income; bank loan funds an opt

Postby johnep » Sat Jul 27, 2013 7:42 am

Bank loans are attractive in a good economy with the risk of rising bond prices. They are similar to high yield bonds in that they loan to companies with weaker credit. Thus they are vulnerable to losses, just like HY, when the economy weakens. I think a small allocation is reasonable as long as you understand the risks. BTW, Fidelity also has a pretty good bank loan fund, FFRHX. There are only a few funds of this type.
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Re: looking to increase fixed income; bank loan funds an opt

Postby feh » Sat Aug 03, 2013 4:20 pm

Just an update - I purchased some SAMBX (ER .60) that equals 5% of our total portfolio, and 17% of our fixed income.
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