We asked several advisors which funds they consider for the rising interest rate scenario.
Louis P. Stanasolovich, CFP, Legend Financial Advisors Inc., Pittsburgh
o Franklin Adjustable US Government Securities (FAGZX)
o Eaton Vance Global Macro Absolute Return (EIGMX)
o Templeton Global Bond (TGBAX)
All the funds either invest in instruments that adjust their interest rates (Franklin Adjustable U.S. Government Securities and Eaton Vance Floating Rate) or they can short currencies, bonds, or avoid interest rate markets (Eaton Vance Global Macro Absolute Return and Templeton Global Bond).
Target allocations: It depends upon which portfolio we invest in. Generally, the allocation for each fund will range from 3.0% to 15.0% dependent upon how conservative (the more conservative, the more of an allocation) the portfolio is.
David Zuckerman, CFP, CIMA, Zuckerman Capital Management, LLC, Los Angeles
TIPS are one of the only ways that investors can hedge interest rate risk out of a fixed income portfolio. Certain bonds issued by financially responsible foreign governments (i.e., Norway, Sweden, and Australia) may also provide an indirect hedge against higher levels of inflation in the U.S.
The mutual fund we use for TIPS exposure is PIMCO Real Return Institutional (PRRIX), and depending on goals and risk tolerance I will position up to one-third of a client’s fixed income portfolio in the fund.
Templeton Global Bond Advisor (TGBAX) is the bond fund that we use to position clients in foreign government bonds. Depending on risk tolerance, I will typically position up to half of a client’s fixed income portfolio in this fund.
For conservative clients that are focused on minimizing interest rate risk, low duration bond funds play an important role and PIMCO Low Duration Institutional (PTLDX) is a core holding where we will position up to 40% of a client’s fixed income portfolio.
John F. McAvoy, CFP, Waterstone Retirement Services, Canton, Mass.
Rydex Inverse Government Long Bond Strategy (RYJUX): This fund uses no leverage and is the inverse of 20 year treasury rate.
Eaton Vance Global Macro Absolute Return Fund (EAGMX): This fund strives for absolute returns using a Global Macro strategy which invests in currencies and sovereign debt.
Absolute Strategies Fund (ASFIX): This fund also strives for appreciation with an emphasis on positive returns and low correlation to either fixed income or equity benchmarks. This is a fund of funds which has multiple strategies and managers.
Generally, I use these funds in tandem. Depending on the client’s risk tolerance, I allocate between 15-30% of a portfolio into these hedging strategies.
Jay Hutchins, MS, CFP, AIF, The Wealth Conservatory, Lebanon, N.H.
We use Fidelity Floating Rate fund (FFRHX) as a short-duration hedge against rising interest rates. It offers a better yield than short Treasurys and automatically rolls over to the higher rates at the bank loan notes mature/renew.
We also use Neuberger Berman’s High Yield fund (NHINX), because it has an intermediate-term duration of around four years and an interest rate up around 8%.
It would take a two-percent rise in 10-year Treasurys per year to erase the 8 percent income. So, it offers good income until interest rates begin to edge up; and a pretty good hedge against all but skyrocketing rates once they do.
PIMCO also has a great emerging market bond fund (PLMIX) with an extraordinarily short duration.
Again, as with the TIPS, the objective is not specifically targeted to benefit from rising interest rates; but, it is an excellent way to hedge a weak dollar without taking on interest rate risk.
Paul S. Baumbach, CFA, CFP, ChFC, Mallard Advisors, LLC., Newark, Del.
I began using Oppenheimer Senior Floating Rate (XOSYX, XOSAX) and Eaton Vance Floating Rate (EIBLX Rate (EIBLX) funds in client accounts.
It seems likely that the economic recovery is continuing and is likely to continue for many quarters, during which the underlying borrowers will find gradually improving conditions, and where returns for bank loan funds such as these should be superior to fixed-rate bond funds.
These types of funds did well in the mid-2000s, as we were recovering from the dot-com crash. These funds are not ‘all season’ funds, but rather are appropriate for a given period during the business cycle.