The Best And Worst Funds For Rising Interest Rates

Ted

FYI: Now that rising interest rates are looking increasingly likely for 2015, now is the time to start structuring your portfolio accordingly to maximize returns and minimize losses. Even if the Federal Reserve doesn’t start monetary tightening by raising borrowing costs well into next year, it is wise to begin making your moves before the Fed makes theirs.
Regards,
Ted
http://investorplace.com/2014/10/best-funds-worst-funds-rising-interest-rates/print

JohnChisum

A good link.

I've been looking at utilities funds for when the time comes. I don't hear much about them here. Anyone else contemplating them?

As for the bond plays, it has been said over and over that short duration bonds do better in rising rate scenarios. This article seems to debate that. More confusion.

scott

JohnChisum said:

A good link.

I've been looking at utilities funds for when the time comes. I don't hear much about them here. Anyone else contemplating them?

As for the bond plays, it has been said over and over that short duration bonds do better in rising rate scenarios. This article seems to debate that. More confusion.

Long infrastructure (BIP, INF) rather than utilities in the traditional sense.

AndyJ

John, like the article says but doesn't go into detail on, there's more to the story than just a general "rising rate scenario." At the most basic level, if it's the Fed raising its key short rate, the part of the curve directly affected is the short end, and if it's the economy surging, the longer end is more directly affected than with Fed rate increases alone.

That's a good article, and makes a good case for keeping at least some bond exposure in the intermediate-duration range. Short non-IG is another story, probably/usually more affected by what's happening with equity/credit risk than with rates.

A talking point you see fairly frequently is that utes are the most "bond-like" of stocks and so don't do well when rates rise. But they did really well in 04-07, when the Fed's raising its short rate was the main thing going on with rates.

One thing the author doesn't mention is that the dollar was on a steady decline during that time (a big factor in the outperformance of foreign stocks then); not sure exactly how that affected U.S. bonds and utes.

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msf

Scott may have a good point. Since deregulation, most "utilities" funds hold a lot of companies that are not "utilities" in the traditional sense. By traditional I mean companies that have struck a bargain with local governments - they get a guaranteed rate of return and a monopoly in exchange for serving in the public interest. Basically, cash cows - little appreciation but good "widows and orphans" companies.

Here's a quick one pager on utilities in Texas (it's not much different elsewhere) showing that now, the only part of the electric industry that still functions this way is the transmission/distribution (wires) portion of power providers.

I keep an eye on Franklin Utilities (FRUAX) - as M* notes, it tends to invest in traditional utility (electric/gas) companies, unlike many of its peers that invest in more volatile energy production and telecom companies. M* supports Scott's suggestion, noting that if you're going to invest in the energy companies, the infrastructure portion is more stable.

Derf

Would GASFX come into play here? They both chart about the same.

Derf

johnN

Anyone dumping bonds/bonds funds?

expatsp

SUBFX has a negative duration and a lot of cash. Hasn't been a great bet so far, but if interest rates rise, they'll profit.