Fund in Focus: Mackenzie Floating Rate Income Fund

First-quartile longer-term returns

The Mackenzie Floating Rate Income Fund invests in a diversified portfolio of floating-rate loans and notes. These are usually loans issued by companies whose payout fluctuates with the prevailing rate of interest in the economy. The rate paid is typically based on a well-known benchmark rate such as LIBOR.

These types of investments are attractive to investors because the fluctuating interest rate reduces the amount of rate sensitivity in the portfolio, which is reflected in the fund’s low duration of less than half a year, compared with 7.5 years for more traditional bonds. And at a recent 7.8%, the higher yield to maturity also compares favourably with the 2.4% for the broader Canadian bond market.

Of course, the risk is higher too, as the fund focuses on high-yield holdings with only about 6% of holdings classified as investment-grade. This means the risk of default is significantly higher than with a traditional bond fund.

Another risk is that these loans tend to be less liquid than other fixed-income investments. This may make it more difficult for the manager to sell out of positions if there is a run on redemptions.

Managed by long-time fixed-income veteran Steve Locke and his team, the fund uses a mix of top-down macro analysis combined with bottom-up credit analysis, focusing on loans where they believe they are being well compensated for the risk.

Performance has been strong, with a 5-year average annual compounded rate of return of 3.8% to March 31, putting it comfortably in the first quartile of performance. The fund has an edge in its more active style, allowing the manager to trade more frequently and take profits in loans that have performed well. This is still possible given the fund’s current size. But if assets grow significantly, liquidity may begin to hinder the more frequent trading. Volatility has been low recently, with a 3-year average annual standard deviation of 2.44%, for the lowest FundGrade volatility ranking of 1/10.

While I like floating-rate funds as a way to generate higher income and reduce interest-rate sensitivity, I don’t believe them to be appropriate as a core holding. Instead, they are a great addition to an otherwise well diversified portfolio. For those looking for floating rate exposure, this is certainly a fund worth considering.

Mackenzie Floating Rate Income Fund
Fund company: Mackenzie Investments
Fund type: Floating Rate Loans
FundGrade Rating: B (March)
Style: Bottom-up Credit Analysis
Risk level: Low-Medium
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Steve Locke since June 2013; Felix Wong since June 2013
MER: 1.76% (Front-end load units)
Fund Code: MFC4336 (Front-end load units)
Minimum investment: $500

Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.

Notes and Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.