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TRP Floating Rate - Risk vs Reward

Some people may recall I'm managing my MILs money at TRP. It's mostly in MM and right now showing at YTD loss of 3%. So all in all not terrible.

Now one reason I invested in PRFRX was because I thought it would offer better reward than MM with modest risk. However now I'm comparing its YTD performance against some other funds in the account - PRWCX, RPGAX - I'm left wondering if this is a one-off situation or going forward it's going to be a trap. Would appreciate if anyone had any insight / opinion to offer.


  • You may want to checked again on TRP website. YTD as of 3/20/2020 is -17.2% ! Floating rate bonds are BBB and below rated bonds, i.e. junk bonds. Junk bonds move in the same direction as equities, thus has no downside protection.
  • edited March 25
    @Sven - Why do you think I started this post :-). I know it's bad.

    My problem is when I see "floating rate", I don't look at portfolio. What I hear is that it will yield me the prevailing interest rate.

    Now if someone is selling me an S&P 500 Index fund, I'm not going to look at the portfolio to see if it is stocked 50% with small cap stocks. I just wouldn't think about ding that.

    In any case, my question goes beyond portfolio of TRP. Isn't a "floating rate" fund supposed to be less risky than a "balanced" or "allocation" fund which can invest 60% odd in equities? What is the risk / reward equation from here going forward?
  • Floating rate funds also got creamed in the 2008 crash. We have a small percentage of my wife’s Roth IRA in PRFRX but plan to continue holding rather selling at a loss. I am confident that it will bounce back in time.
  • @Tarwheel - Right there. Objective. PRFRX not around or at least I cannot find data for 2008 time period. I'm taking a wild guess, but perhaps Vanguard Total Bond Market index came out well during the same interval of time. If I had seen that I would never have bought PRFRX.

    Can you offer some other reputed floating rate for comparison that was around during the financial crisis?
  • Fidelity’s floating rate fund (FFRHX) was around in 2008 and before, and it seems to have similar returns to the TRP fund.
  • edited March 25
    @Tarwheel. You have officially proved I'm an idiot. I did bloody read, BUT I never read properly. maybe because I read it on my phone. The "Risks" and "Rewards" sections are flipped on TRP website but "Rewards" are in left column. I never read the right column else I would never have invested in this fund. Like I mentioned it's for my MIL who's 80 years old.

    Straight from TRP website.

    The floating-rate feature virtually eliminates interest rate risk.
    Bank loans typically rank higher in the capital structure for repayment.
    Low historical return correlations with other asset classes, including high-yield bonds, make bank loans a diversifier for equity and fixed-income portfolios.

    ... AND ...

    The loans and debt securities held by the fund are usually considered speculative and involve a greater risk of default and price decline than higher-rated bonds.
    This fund could have greater price declines than a fund that invests primarily in high-quality bonds or loans.

    The ones highlighted line led me to believe the fund was invested in government securities only. Next time I see "interest rate risk" I'll know better.

    I dunno why I assumed "floating rate" with safety. Thinking I will make 0.1% when rates were very low and about 3% when rates were about that. Then again, I somehow don't believe I'm the only one who's stupid. I can't imagine why any sane person would invest in floating rate funds. The risk/reward is simply not there and simply plotting say PBDIX against FFHRX shows that. "Diversification" like this I don't need.
  • You’re not the first one to make “mistakes” like this, myself included. However, I’m planning to continue to hold our stake in PRFRX, at least until it rebounds. With all of the money that governments are pouring into the markets and the extremely low interest rates, it seems that rates will start rising at some point and floating rate funds will excell.
  • I also invested in thi s dog for similar reasons
  • edited March 25
    @Tarwheel. Please tell me why not enjoy the rebound in some other fund and take tax loss here. My mistakes notwithstanding, it is not providing any diversification benefits. The whole point of this fund was to avoid a situation like 2008. Wouldn't we do better in just about any equity, balanced, bond index fund during the "rebound"?
  • Take a look at the historical returns for high yield and floating rate funds in 2008 and 2009. Most of them lost big in 2008 but had huge gains in 2009, in some cases as much as stock funds. However, there are no guarantees that history will repeat for stocks or bonds.

    In a somewhat related matter, muni bond funds and high yield munis also lost big recently (and in 2008). Muni funds had huge increases today — 3-5% — which is unheard of for munis. Personally I think most of the recent bond fund drops were due to liquidity issues from traders selling bonds, after stocks dropped so much, and overwhelming the markets.
  • I bought Fidelity's version as an inflation play. So I leave it alone in case inflation comes back. It's the "fun" side of my TIPS fund.

    I'll admit that it's hard to ignore the whimpering right now.

    However. As I understand the thesis, if interest rates rise you don't take the duration hit.

    So. Diversification and all that.

    Your mileage may vary.
  • muni bond funds and high yield munis also lost big recently (and in 2008). Muni funds had huge increases today — 3-5% — which is unheard of for munis. Personally I think most of the recent bond fund drops were due to liquidity issues from traders selling bonds, after stocks dropped so much, and overwhelming the markets.
    I agree. I notice muni money market now yielding 4% comparing to the typical 1% of federal money market funds. This is seldom observed.

    For example,
    Vanguard Federal money market, VMFXX, 7 days yield, 0.82%
    Vanguard Muni money market, VMSXX, 7 days yield, 4.05%

    Liquidity issue?

  • Two tax managed funds that hold a blended balance of munis and equities are USBLX and VTMFX.
  • TAIFX is another balanced fund with munis and tax efficient equities.
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