Floating rate funds: Protection from rising rate

Posted Jul 20th 2007 9:29AM by Steven Halpern

"There's a lot more skittishness in the bond market over the direction of interest rates." says bond expert Neil George.

In his The Bond Desk newsletter, the advisor explains, "One way to protect your bond portfolio against rising rates is to consider the floating-rate portion of the market."

Instead of having a fixed-rate, he notes, floating-rate coupons are set or re-set on an ongoing basis, monthly, quarterly, semiannually or annually depending on coupon frequency of the issues.

One of his floating rate favorites is ING Prime Rate Trust (NYSE: PPR), which focuses on the corporate debt of secure borrowers located principally in the US. He notes, "Although it carries the Netherlands-based bank's name, the fund's management is all red, white and blue."

And,he adds, that team has kept the fund consistently in the black with a five-year return running at an annualized 8.2%. Yielding in the mid-7% range and trading at a steady discount to net assets of about 3 percent, he considers ING Prime Rate Trust at the "top of his buy list."

The advisor also recommends BlackRock Global Floating Rate Income Trust (NYSE: BGT) which is invested in the US and beyond, primarily in corporates, as well as floating-rate bonds issued by government agencies. The credit is lower-grade, he notes, with the bulk of the current holdings in the BB+ range.

George state, "This might seem daunting, but take a look and you'll see that the actual borrowers are many of the major petrol companies and agencies around the world." He points out that BlackRock Global Floating Rate Income Trust trades at a modest discount to assets of just more than 3% and provides a dividend yield just shy of 8%.

The third in his floating rate trio is LMP Corporate Loan Fund (NYSE: TLI), which primarily invests in corporate issues, including floating rate bonds, preferreds and hybrid corporate securities that pay out a regular to adjustable stream of cash flows.

Like BlackRock Global Floating Rate, he observes, credit quality averages are lower, although the bulk of the assets are running in the Ba1-3 range.

He says, "The fund is a similar bargain with a current market discount to net asset value of more than 3%. The dividend yield is running near 8%. In the years since its 1999 debut, the worst return was only 5 percent; for the past five years it's been running at 25% overall."

Each day, Steven Halpern's TheStockAdvisors.com features the latest investment ideas and market commentary from the financial newsletter community.

Tags: floating rate funds, ing prime rate trust, IngPrimeRateTrust, neil george, ppr, rising rate bond funds, steven halpern, the bond desk newsletter, thestockadvisors.com