Understanding Floating Rate Income Funds: How This Asset Class Has Delivered for Investors
Curious about floating rate income funds and how they differ from other asset classes? The Catalyst/CIFC Floating Rate Income Fund (CFRIX) offers an opportunity for investors seeking high current income from adjustable-rate securities. In this piece, we sit down with Natalia Lojevsky of CIFC Asset Management to discuss the potential benefits of floating rate income funds.
1. For investors unfamiliar with the asset class, what are senior secured corporate loans that floating rate funds invest in and how do they differ from traditional fixed income asset classes?
If you are familiar with traditional fixed income investments such as investment grade bonds, municipal bonds, high yield bonds or emerging market bonds, then you already know loans. A loan in the U.S. broadly syndicated loan market is a senior secured, floating rate debt obligation of a large corporate issuer.
These loans are issued by, distributed by, traded by, invested in by and rated by the same entities involved in traditional fixed income. However, there are two key differences:
- Loans are floating rate not fixed rate.
- Loans are secured by collateral.
Senior secured floating rate loans are typically less volatile and are higher in the capital structure over traditional bonds which are, generally, unsecured, fixed rate, more volatile and are sometimes lower rated.
Source: JP Morgan, Bloomberg. As of September 22, 2023.
The asset class has been called by many different names over its three-decade long history – senior secured corporate loans, floating rate loans, bank loans, leveraged loans, institutional loans – but it all encompasses a mature, liquid, $1.4 trillion market with ample opportunity for investments.
2. What diversification benefits does this asset class provide? And if an investor had a 60/40 stock/bond portfolio, how would you reallocate their portfolio to include floating rate loans?
Senior secured corporate loan funds today are being used as a replacement for traditional fixed income and in our opinion should be incorporated into the approach as such. Traditional fixed income is not only exposed to the risk of the issuer, but also duration risk. Loan funds are a new generation fixed income product which can potentially mitigate interest rate risk, are less correlated with other asset classes and have a lower volatility profile. These funds allow investors to move beyond the traditional 60 / 40 model to more effectively:
- Generate Income – through attractive streams of cash flows of large corporate borrowers.
- Preserve Capital – by shifting to a lower volatility asset class with embedded inflation hedging characteristics.
- Boost Risk-Adjusted Returns – loans have historically delivered higher risk-adjusted returns than both traditional equity and fixed income asset classes.
1 Source: Bloomberg, data as of September 30, 2023. Risk-adjusted for volatility ratio represents the annualized return divided by the annualized standard deviation. Past performance is not an indication of current and future returns. More recent data available upon request. Please see the Disclaimer for a description of the indices.
3. Floating rate funds have historically been viewed as a tactical allocation rather than a core investment. What changed over the years that more and more people are viewing it through the same lens as stocks or bonds?
As the loan market has grown, investors have become more comfortable with the investment space. People are seeing the benefits that we previously outlined – investors want to generate income and they want lower volatility – and that’s what they’ve been getting from floating rate funds.
Source: J.P. Morgan, data as of September 30, 2023. This information is for illustrative purposes only.
4. The Fed recently indicated that interest rates are likely to stay elevated, a switch from the ‘low for long’ mantra that dominated markets prior to the recovery from COVID. How does this impact floating rate income funds like CFRIX?
The Fed has unequivocally put investors on notice that interest rates will be held “higher for longer”, fostering a market environment that looks much different than recent decades. A prolonged period of higher interest rates as well as lingering inflation is a challenge to traditional equity and fixed income asset classes but is a green flashing light for front end, short duration credit strategies such as senior secured loans.
Below we show an analysis how have performed in rising, flat, and falling rate environments. We are listening to the Fed and expect rates to stay flat for some time, but note that even in falling rate environments, the asset class has historically been positive, thus in our opinion, providing a safety net for investors and a diversifier in case markets were to remain volatile and turn once again.
Source: Credit Suisse and Bloomberg Indices. “Rising” indicated by an increase of more than 50 bps. “Falling” indicated by a decrease of more than 50 bps. Data reflects rolling 12-month periods from 01/31/93 through 9/30/2023
5. What differentiates CFRIX from other floating rate funds? How has it performed versus different benchmarks historically?
CFRIX provides investors with a “stay rich not get rich” investment profile. The fund tends to focus on larger, more liquid U.S. corporate issuers with a higher quality bias. It does not use any leverage, derivatives or shorts. It also does not take on outsized exposure to low quality, low-rated, stressed / destressed, or illiquid risk. In addition, unlike the benchmark indexes, the fund employs cash actively in order to provide a buffer in the portfolio during times of market turmoil and bring down the overall volatility of the fund.
With over $40 billion in assets under management, we believe we have the size and scale to successfully navigate credit markets. At CIFC Asset Management, we follow consistent and scalable investment processes, guided by rigorous principles with a focus on downside-risk management and bottom-up fundamental credit research.
We maintain a relentless focus on risk, with a risk management framework relied on by more than 400 institutional clients. I’ve included our recent performance below. Past performance does not guarantee future performance, but the performance below shows the fund outperforming the Bloomberg Aggregate Total Return Index over 1, 2, and 3 years, as well as since the product’s inception in 2012.
Data as of quarter end: 2023-12-31T00:00:00
Annualized if greater than a year
|3 Years Annualized
|5 Years Annualized
|10 Years Annualized
|Since Inception Annualized
|Class A w/Sales Load
1 Prior to August 1, 2018, the Fund implemented a different investment strategy and had a different investment manager.
|Class A w/ Sales Load
|Prospectus Gross Expense Ratio (11/1/2023)
|Prospectus Net Expense Ratio (11/1/2023)
|Annual Report Net Expense Ratio (6/30/2023)*
*The advisor has contractually agreed to waive management fees and/or reimburse expenses of the Fund to the extent necessary to limit total annual fund operating expenses (excluding brokerage costs; borrowing costs such as (a) interest and (b) dividends on securities sold short; taxes; and extraordinary expenses, such as regulatory inquiry and litigation expenses) at 1.15%, 1.90%, 1.90% and 0.90% for Class A shares, Class C shares, Class C-1 shares and Class I shares, respectively, through October 31, 2024.
The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that investor’s shares, when redeemed, may be worth more or less than their original cost. For performance information current to the most recent month-end, please call toll-free 866-447-4228.
Past performance is not a guarantee of future results.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Catalyst Funds. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 866-447-4228 or at www.CatalystMF.com. The prospectus should be read carefully before investing. The Catalyst Funds are distributed by Northern Lights Distributors, LLC, member FINRA/SIPC. Catalyst Capital Advisors, LLC is not affiliated with Northern Lights Distributors, LLC.
Investing in the Fund carries certain risks. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. Investments in foreign securities could subject the Fund to greater risks including, currency fluctuation, economic conditions, and different governmental and accounting standards. The Fund’s portfolio may be focused on a limited number of industries, asset classes, countries, or issuers. The Fund may invest in high yield or junk bonds which present a greater risk than bonds of higher quality. Other risks include credit risks and interest rate for Floating Rate Loan Funds. Changes in short-term market interest rates will directly affect the yield on the shares of a fund whose investments are normally invested in floating rate debt. Floating Rate Loan Funds tend to be illiquid, the Fund might be unable to sell the loan in a timely manner as the secondary market is private, unregulated inter-dealer or inter-bank re-sale market. These factors may affect the value of your investment.
Diversification does not ensure a profit or guarantee against loss.
There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.
Diversification is a risk management strategy that creates a mix of various investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt to limit exposure to any single asset or risk. Duration Risk measures a bond’s sensitivity to interest rate changes. Risk-adjusted returns are a calculation of the profit or potential profit from an investment that considers the degree of risk that must be accepted to achieve it. Derivatives are financial contracts, set between two or more parties, that derive their value from an underlying asset, group of assets, or benchmark. Leverage refers to the use of debt (borrowed funds) to amplify returns from an investment or project. Investors use leverage to multiply their buying power.