Tag Archives: mutual funds

401(k) Fund Spotlight: Franklin High Income

Summary Franklin High Income has been the worst performing high yield bond fund over the last twelve months. The fund has suffered due to its heavy exposure to commodities via the debt of energy and materials companies. The fund sports a 7.14% yield, but investors should subtract 1% for the fallout that is to come to the coal debt the fund still holds. High yield debt will likely rebound in the short term, but I’d rather own small cap U.S. stocks instead. Introduction I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article, it is helpful to understand my approach to investing in 401(k)s . I strive to write these articles for the benefit of the novice and professional. Please comment if you have a question. I always try to give substantive responses. Franklin High Income Fund The Franklin High Income Fund has the following share classes: If the fund is an option in your 401(k), it will likely come in the form of the R or R6 shares. The expense ratio for the R shares is 1.11% and for the R6 shares it is .47%. For the purposes of this article, I will assume the A shares are being discussed since that share class holds most of the fund’s assets. Some readers may also own the fund outside of a company retirement plan. The expense ratio of the A shares is .76%. The Franklin High Income Fund is a typical high yield bond fund investing in lower-rated, higher yielding corporate bonds. As of September 30, 2015, the fund’s holdings were most heavily weighted to the following six industries: Energy – 16% Health Care – 10% Finance – 8% Cable Satellite – 8% Metals & Mining – 7% Wireless – 7% Beaten Up By Energy Investors who have pay attention to the markets would be right to be concerned about the large exposure to Energy and Metals & Mining, which make up almost a quarter of the portfolio. Actually, 25% of the portfolio was in energy last November and this has clearly been a source of pain for the fund since. Here is a few places where some serious damage was done: Bond Principal Amount on November 30, 2014 Market Value as of November 30, 2014 Principal Amount on September 30, 2015 Market Value as of September 30, 2015 Alpha Natural Resources $25,000,000 $19,812,500 $25,000,000 $1,812,500 Chaparral Energy ( 3 different issues ) $31,700,000 $31,339,000 $31,700,000 $9,866,500 Peabody Energy ( 3 to 4 issues ) $64,400,000 $61,575,000 $58,445,000 $17,831,000 Quicksilver Resources $35,000,000 $27,925,000 $15,175,000 $5,690,625 Terrible Performance Recently, But Better Long-Term I suspect that this is the primary reason why the fund has been the worst performing high yield bond fund over the last year (at least it is using the Barron’s fund screener ). The following chart shows the vast underperformance of the fund over the last 12 months versus the iShares High Yield Corporate Bond ETF (NYSEARCA: HYG ), a good proxy for a high yield index. FHAIX Total Return Price data by YCharts However, to be fair, the fund’s longer term performance has been much better, as shown on the following chart: FHAIX Total Return Price data by YCharts Outlook It is likely that in the near term the worst is over for high yield bonds and the Franklin High Income fund. However, the fund’s 7.14% 30-day SEC yield is still not enough to tempt me. The fund continues to have a fair amount of exposure to the U.S. shale oil and gas industry. I am bullish on oil, but this may very well come at the expense of more bankruptcies in the U.S. shale industry. The fund continues to hold debt of coal companies Alpha Natural Resources ( OTCPK:ANRZQ ), CONSOL Energy (NYSE: CNX ), and Peabody Energy (NYSE: BTU ). I’ve done the research on coal and I remain bearish. As far as I’m concerned, you might as well subtract 1% off this fund’s yield to cover the fallout that is coming. I will give the fund an honorable mention though for holding a little over 1% of the portfolio in the 2022 debt of Fortescue Metals, a company whose debt I have touted several times on Seeking Alpha. The one advantage that this fund and the high yield universe, in general, currently has is that interest rates have yet to rise. There is less rollover risk for companies having to refinance their debt. Because of this, I would not be surprised to see high yield bonds stage a comeback in the short term. Strategic Positioning My view is that we are entering the latter stages of the economic cycle and high yield bonds have already felt the tremors of more trouble to come. At present, I prefer to hold U.S. equities-namely small caps where valuations have recently come down quite a bit-over high yield debt and also a lot of cash. Nevertheless, if the fund’s high yield is too much for you to pass up, given that short term rates are near zero, I would limit exposure to no more than 5% of your entire 401(k). Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to Americans within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser.

Risk Parity Investors Concerned About Performance

By DailyAlts Staff Risk parity strategies are designed to perform irrespective of general market conditions, but this doesn’t mean that they’ll always outperform – not even during a downturn. The global swoon that began when China devalued its currency in mid-August and picked up steam through the latter part of that month and into September left a lot of risk-based portfolios battered and bruised – and this isn’t what their risk-conscious investors had in mind. In fact, according to Chief Investment Officer’s 2015 Risk Parity survey , 42% of risk-parity investors are “quite” or “extremely” concerned about performance – no other concern, from use of leverage to peer risk to transparency – comes close. And as a result of these concerns, just 19% of respondents said they planned to increase their risk-parity allocations in the next 12 months, while 16% said they planned on decreasing their allocations. About the Survey Respondents CIO’s survey involved 93 risk-parity investors from the U.S. (74%), Europe (18%), Canada (4%), and other countries (5%). Forty-seven percent had assets of more than $15 billion, while 23% had assets between $5 and $15 billion, and 24% had between $1 and $5 billion. Small users – those with less than $1 billion in assets – accounted for just 5% of respondents. Corporate pension funds were a plurality of respondents at a 37% share, while public pension / sovereign wealth funds and endowment and foundations represented 17% and 10%, respectively. Thirty-five percent of respondents were categorized as “other.” Investor Concerns Only 13% of respondents said they were “not at all” concerned about risk-parity performance, while 21% said they were “extremely,” 21% “quite,” 23% “moderately,” and 23% “a little” concerned. By comparison 62% said they were “not at all” concerned about there being “no explicit bucket” to put risk parity in, 50% were “not at all” concerned with “the passive approach some vendors take,” and 47% were “not at all concerned” that there “are not enough viable manager offerings.” Zero percent of respondents said they were “extremely” concerned about peer risk – compared to 21% for performance. To say performance is the major concern of risk-parity investors is an understatement. Allocating to Risk Parity Fifty-three percent of respondents said they fund risk parity from their equities “bucket,” making it the most popular answer. Interestingly, 24% said they have a dedicated allocation to risk parity – up from just 18% the prior year. Nineteen percent said they funded risk parity from their alternatives bucket, which was down from 25% in 2014. The bigger the investor, the more likely they were to have a dedicated risk parity bucket: Among respondents with over $5 billion in assets, 29% had dedicated allocations; while only 14% of respondents in the $1 billion to $5 billion group and zero-percent of the sub-$1 billion group funded risk parity from a dedicated bucket. These smaller investors funded risk parity from their equity and fixed-income buckets by a ratio of two-to-one. A plurality of respondents said they used an absolute return benchmark, i.e. “T-bills +x%.” This response grew in popularity from 25% in 2014 to 37% in 2015 – while using the traditional “60/40” portfolio as a benchmark fell in popularity. Conclusion Some pundits seriously question whether risk parity may have helped bring down markets in August. According to CIO, the fact that the question is being taken seriously should “warm the hearts” of risk-parity investors, since the still-tiny strategy has successfully “seeped into the collective consciousness of Wall Street and the media that cover it.” In CIO’s view, risk parity is still too small to have caused much damage – but the increased awareness could be good for the strategy going forward.

4 Top-Rated Short-Term Government Bond Mutual Funds For Steady Yield

A short-term government bond fund is a mutual fund that’s limited, by its investment objectives and fund bylaws, to investing primarily in short-term obligations of the federal government or its agencies. Depending on the fund’s definition, short term can be up to five years. Meanwhile, mutual funds investing in government debt securities are among the most secure investment options which provide regular income while protecting the capital invested. Funds which are part of this category bring a great deal of stability to portfolios with a large proportion of equity, while providing dividends more frequently than individual bonds. Hence, they are considered to be the safest in the bond fund category and are ideal options for the risk-averse investor. Below we will share with you 4 top-rated short-term government bond mutual funds. Each has earned a Zacks Mutual Fund #1 Rank (Strong Buy) as we expect these mutual funds to outperform their peers in the future. Fidelity Spartan Short Term Trust Bond Index Fund (MUTF: FSBIX ) invests a major portion of its assets in securities included in the Barclays U.S. 1-5 Year Treasury Bond Index. FSBIX uses statistical tools such as duration, maturity, interest rate sensitivity, security structure, and credit quality to imitate the returns of the index. The Fidelity Spartan Short Term Trust Bond Index Fund returned 1.1% in the last one year. FSBIX has an expense ratio of 0.20% as compared to a category average of 0.80%. Vanguard Short Term Treasury Fund (MUTF: VFISX ) seeks current income with minimum price volatility. VFISX invests a large share of its assets in U.S. Treasury instruments such as bills, bonds, and notes. VFISX seeks to maintain a dollar-weighted average maturity between 1 and 4 years. The Vanguard Short Term Treasury Fund returned 0.9% in the last one year. Gemma Wright-Casparius is the fund manager and has managed VFISX since January 2015. JPMorgan Short Duration Bond Fund A (MUTF: OGLVX ) invests a large portion of its assets in investment grade debt securities having short-to-intermediate maturities. These include U.S. government obligations, and mortgage-backed and asset-backed securities. OGLVX selects individual securities on the basis of a risk/reward analysis, including an evaluation of interest rate risk, credit risk, and the legal and technical structure of the transaction. OGLVX offers dividends monthly and capital gains annually. The JPMorgan Short Duration Bond Fund A returned 0.4% in the last one year. As of August 2015, OGLVX held 1636 issues, with 2.85% of its total assets invested in US Treasury Note 0.625% Oppenheimer Limited-Term Government Fund A (MUTF: OPGVX ) seeks current income. OPGVX invests the majority of its assets in debt securities issued by the U.S. government. OPGVX may also invest a maximum 20% of its assets in mortgage-backed securities, which are not issued by the U.S. government. OPGVX aims to maintain an average effective portfolio duration of a maximum of three years. The Oppenheimer Limited-Term Government Fund A returned 0.8% in the last one year. Peter A. Strzalkowski is the fund manager and has managed OPGVX since April 2009. Original Post