T. Rowe Price Institutional Floating Rate Fund - F Class [PFFRX]
By: Ted Black, CFP©
Spring 2022 (Vol. 40, No. 1)
Our approach to portfolio construction is focused on building a diversified group of holdings with best efforts aimed at striking the appropriate balance between risk and reward given an investor’s personal financial situation. Although there may be other investments deemed to be viable additions along the way, the process in its base form includes deciding what percentage of a portfolio should be in Stocks, Bonds and Cash/Money Market. The primary objective of the Stock portion of the portfolio is to provide long-term capital appreciation, whereas the Bond and Cash allocations provide stability during volatile periods in the market and also provide regular dividends that can be reinvested or taken in cash.
This article briefly outlines the challenges a rising interest environment poses to the Bond portion of a portfolio. Within the massive bond market, particular attention is paid to the yield on the 10-year U. S. Treasury Note. Its current yield is seen as a benchmark from which many consumer and commercial loan rates are based. As of this writing, the current yield on the 10-year U.S. Treasury is right about 2.84%, up from 1.30% when I first profiled this fund last June.
As we all know by now, inflation here in the U.S. is as high as it’s been in decades and the Federal Reserve Board (the Fed) has vowed to do what it takes to bring it under control. The Fed’s primary tool to tame inflation is to raise interest rates, which it has begun doing and forecasts it will keep doing until they feel they have the situation in hand. Makes sense, but a rising interest rate environment produces headwinds for Bonds. To help illustrate the challenges even the highest quality investment grade Bonds face, the Bloomberg U.S. Aggregate bond index, which is the generally accepted as the proxy for U.S. investment grade bonds, is down 5.93% year-to-date as of this writing.
In an effort to maintain an exposure to Bonds, yet minimize the associated interest rate risk, I think it’s worth considering the T. Rowe Price Institutional Floating Rate Fund – F Class (PFFRX). Floating Rate funds, also called Bank Loan funds, are mutual funds that buy loans made by banks or other financial institutions to companies that pay interest based on a floating, or variable rate. As its name implies, a floating rate is not fixed, but rather a rate that adjusts periodically based on a publicly available, short- term referenced interest rate such as the U.S. Prime Rate. This being the case, rising interest rates can potentially be beneficial to both the current yield and underlying share price of these funds.
Bank loans are usually senior secured debt and are mostly rated below investment grade because the borrower’s ability to repay may be viewed as speculative. Such loans are used for general corporate purposes as well as to refinance debt and fund acquisitions, leveraged buyouts or recapitalizations. In an effort to manage risk, the fund is broadly diversified across 125-150 different issuers, with strict exposure limits.
This fund pays dividends on a monthly basis, and currently has an annualized yield of 3.87%. The lead manager of the fund is Paul Massaro, who has been with T. Rowe Price since 2003 and at the helm of this fund since 2009. With all share classes combined, the fund has in excess of $7.1 billion under management.
If you’re interested in this fund, or would like a portfolio review to determine if this fund might be an appropriate addition to your portfolio, please call Ted Black, CFP© at 888-878-0001, extension 3.
Performance annualized and updated through 03/31/2022: 1-Year: +2.72%; 3-Year: +3.74%; 5-Year: +3.59%. The gross annual expense ratio is 0.72%.
Statistics and information provided by Morningstar and T. Rowe Price. Please visit the T. Rowe Price website at www.troweprice.com for the most recent performance information. The principal value and investment return will ﬂuctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Returns shown, unless otherwise indicated, are total returns, including any capital gains or losses and all dividend and capital gains distributions. The performance data quoted represents past performance and in no way guarantees future results. Mutual funds are not FDIC insured.
Mutual funds are sold by prospectus. An investor should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. Please go to www.troweprice.com or contact our office at 888-878-0001 to obtain a prospectus. Please read the prospectus carefully before you invest or send money. Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.