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5 Safe Fixed Income Funds for Retirees

December 13, 2011 | About:
In the years following credit crisis of 2008, fixed income funds have shown substantial recovery with hefty returns. Although, the global credit scene is still overcast with uncertainty, yet on back of robust increase in net asset value coupled with moderate risk profile, these funds are still attractive for cautious investors. Here we present 5 funds that satiate the risk return utility for fixed income seekers. All these funds regularly give dividends to provide consistent income stream.

Oppenheimer Senior Floating Rate Y (OOSYX): The net asset value of this floating rate bank loan fund is around $8.00 which is close to their lower end of 52 weeks trading range of $7.9 and $8.4. The price regression in last few months is not surprising because of the rating downgrade of US. However, the fund was able to absorb the downgrade pressure, reporting most recent yield of 5.93% which is 37bp higher than their competitor fund Eaton Vance Floating-Rate Advantage I (EIFAX) that posted a yield of 5.56%. The fund has demonstrated operational efficiency with expense ratio of 0.77% compared to EIFAX expense ratio of 0.93% while category average was 1.23%. Going forward, the management is expecting expenses to grow at a modest rate, albeit lower than category average, which is likely to contribute in value creation for the fund. The latest one year annualized return for fund stands at 14.76% which is better than EIFAX whose reported annualized return is 12.86%. The risk profile of OSSYX is modest with standard deviation of 10.08% compared to category average of 13.83%. The low risk emanates from funds prudent investment profile that comprises of investing only in local senior claim floating rate loans mitigating the exposure to credit and interest rate risk. Consequently, the 3 year Sharpe ratio for OOSYX stands at 1.27 which is at a premium to category average of 0.31 demonstrating strong performance of OOSYX vis-à-vis its peers. Going forward, with improvement in local credit conditions and stable interest rate regime OOSYX is expected to revert back to the higher end of its trading range making it a buy for fixed income investors.

JHFunds II High Income NAV (JHAQX): The net asset value of this high yield fixed income fund is approximately $6.89 with a yield of 7.83% compared to 7.53% for RidgeWorth High Income I (STHTX) – a competitor fund in high yield market. Although the net asset value was on a lower side of 52 weeks range of $4 and $12 mainly on account of turbulent credit markets, yet the fund was able to post annualized return of 28.81% compared to 22.67% for STHTX. The expense ratio for JHAQV is 0.73% compared to a category average of 1.16%. The expense ratio for STHTX was slightly better at 0.70% but the substantial high yield and annualized returns for JHAQV justify marginally high expenses. The philosophy of fund is to yield high returns by tapping junk bonds market and major investment is in speculative grade securities, therefore, a high risk profile for JHAQV is not surprising. The standard deviation for the fund is 19.43%, which is higher than category average of 15.56% and STHTX mean of 12.99%. The difference in standard deviation emanates from the investment strategy of JHAQV that invests 80% of its funds in junk securities, while for STHTX this investment on average is 65%. Moreover, JHAQV also invests in defaulted securities with expectation for recovery which is nonexistent STHTX. Despite of high risk, the Sharpe ratio for JHAQV is 1.04 substantially higher than category average of 0.61 depicting management’s ability to compensate investors for the risk fund has assumed. Going forward, with appreciating economic conditions, the NAV for the fund is likely to appreciate trailing close to its yearly average. The fund is an investment recommended for fixed income seekers who can tolerate the risk of junk securities.

PIMCO Extended Duration Instl (PEDIX): PEDIX is a duration fund with NAV of $11.37 that is closed to its 52 weeks average of approximately $12 with a yield of 2.78% which is 92 bp higher than its competitor Rydex Govt Long Bond Strategy Adv (RYADX) yield of 1.86%. The reported expense ratio of PEDIX is 0.50% demonstrating superior operational efficiency compared to category average of 0.84% and RYDAX ratio of 1.48%. Going forward, to cater the dynamics of funds market, PEDIX is projecting an increase in expenses though they expect this increase to be lower than the industry average. On back of prudent investment strategies supplemented by control on expenses PEDIX compounded an annual return of 13.8% vis-à-vis 10.08% for RYDAX. PEDIX has a high standard deviation of 33% compared to 27% for RYADX and 18.4% for the category. The difference essentially lies in the securities these two funds invest in. PEDIX investment is targeted on all fixed income securities with varying maturities, while RYDAX duration portfolio mainly comprises of treasury securities. Although, differentiable on basis of risk tolerance, the Sharpe ratio for PEDIX is 0.73 higher than both category average of 0.66 and RYDAX of 0.57 demonstrating fund’s ability to yield returns that compensate for additional risks. Since, the investment philosophy of fund is to trade on duration; the fund will remain stable in medium to long term regardless of the economic shocks. It is a good pick for investors who can tolerate some risk while playing around maturity of fixed income instruments.

GMO Currency Hedged Intl Bond III (GMHBX): GMHBX is a fund targeted for investors seeking returns from international bond markets. The NAV for GMHBX stands at $8.66 with a yield of 4.53% compared to a competitor fund PIMCO Foreign Bond I (PFORX) with a yield of 2.70%. The global funds came under pressure owing to sovereign ratings downgrade of some of EU countries. Similarly, more pressure was added due to deteriorating debt situation in Euro dominated exposures. Despite of these constraints, GMHBX was able to post a return of 5.14% which is better than PFORX annual return of 4.9%. The expense ratio for GMHBX was 0.39% that was better than both peers’ average of 1.12% and PFROX 0.50%. Going forward, management expects expenses to grow at an exponential rate mainly to cater the volatile situation in Euro based fixed income securities but this will be a systemic impact to all global funds and GMHBX projects to mitigate the impact by its expertise. The standard deviation for GMHBX was 5.43% that is lower than category average of 9.13%. The Sharpe ratio of 1.79 for GMHBX is higher than peers’ average of 0.93. Going forward, speculating on improved Euro conditions on account of bail out deals from European Giants, GMHBX is likely to benefit from its global holding appreciating NAV. The fund is must for investors who prefer spicy global returns albeit with higher risks.

GMO Emerging Country Debt IV (GMDFX): GMDFX is a fixed income fund that invests in sovereign debt of emerging economies. The latest NAV for GMDFX is $9.56 with a yield of 9.97% much higher than its competitor Franklin Templeton Emerg Mkt Debt Opp (FEMDX) that has a recent yield of 2.89%. Emerging markets being less affected by the global credit issues enabled GMDFX to post a return of 38% which was higher than its competitor FEMDX return of 30%. The expense ratio of GMDFX stands at 0.34% which is better than its peers’ average of 1.30%. Since GMDFX mostly invest in sovereign government securities and not entities, it is not surprising that GMDFX has a lower standard deviation of 11.36% as compared to 15.96% for the category. The Sharpe ratio for GMDFX is 2.29 which is substantially better than FEMDX ratio of 1.69 and category average of 0.68 representing strong ability of fund management and adequate compensation for associated risks. Going forward, with saturated investment possibilities in developed markets, emerging economies provide a fertile segment to yield returns and with GMDFX investing only in government securities, fund is an attractive investment for investors who would like to experience emerging markets returns with a caveat of mitigating risk.



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