Manulife Floating Rate Income Fund

Analysis: While the consensus is that interest rates are likely to remain low for the near term, there is little doubt that they will eventually be moving higher. One way to help reduce the risk associated with rising interest rates is to invest in a fund that invests in floating rate notes. This is one of those funds

Invests primarily in floating rate loans, but can also invest in other fixed income investments. Floating rate notes and loans (FRNs) will typically pay a rate of interest that will float with some well known interest rate benchmark like the Prime Rate of Interest or LIBOR. These notes are generally issued by corporations or governments.

Within this fund, the focus is primarily on corporate FRNs. They position this fund primarily on their expectations for interest rates. It is their intention to add exposure to FRN’s when rates are low, hoping to capture gains as investor demand increases with likelihood of interest rate hikes. Performance to date looks promising, but there is not really sufficient track record on which to base a proper opinion. It has been more volatile than the other funds in the category.

There is a perception out there is these types of funds are relatively low risk. That is not necessarily the case. For example, looking at the FRN funds that were around in 2008, namely the Trimark Floating Rate Income Fund and the BMO Guardian Floating Rate Income Fund, both experienced significant losses that year. The BMO Guardian offering dropped 45% while Trimark lost 26%. When considering these funds, you need to remember that these are basically high yield bonds and can experience big drops when uncertainty hits.

While we are encouraged by this fund, we would likely favour the Trimark Floating Rate Income Fund over this one for a couple of reasons. First is its lower MER, second is its lower volatility and third is that the same management team has been with the fund since its inception, including the horrific 2008 period.