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Aiming for quality and low volatility with the IA Clarington Floating Rate Income Fund
10/17/2018 10:55:13 PM
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By Dave Paterson  | Wednesday, April 04, 2018


 



With the recent upward pressure on yields, floating rate notes and loans are an effective way to help protect portfolios. These instruments pay a rate of interest that floats with a market interest rate, usually the London Interbank Offered Rate (LIBOR). IA Clarington Floating Rate Income Fund is my favourite fund in the floating rate space because of its focus on quality, income, and low volatility.

The fund has been managed by IA Clarington’s Jeff Sujitno since its launch in 2013. His approach is very simple and is best described as “clipping coupons.” He looks for loans offering an attractive coupon rate that are trading at a discount to par.

The investment process starts with a top-down macro analysis, which helps Sujitno and his team understand the market trends, and risks, and helps set up their outlook. Security selection is done using a fundamentally-driven, bottom-up credit analysis that focuses on cash-flow generation, sustainability of revenues, balance sheet strength, and quality of management.

The fund is typically 70% to 80% invested in floating rate debt, with the balance in high-yield bonds and other asset backed securities. It is well-diversified, holding between 100 and 125 securities. It invests mainly in U.S.-traded issues, with a 62% exposure as of Feb. 28, and all currency exposure is hedged.

Top holdings include the short-term loans and floating rate debt of Ancestry.com, Virgin Media Bristol LLC, Delta 2 Lux Sarl, Staples Inc., and Ziggo Secured Finance B.v.

Performance has been modest, gaining 2.8% for the three years ending Feb. 28, putting it right around the category average. However, with the quality-focused, income-centric approach, volatility has been the lowest in the category, with 3-year average standard deviation of 1.94%, resulting in a leading risk-adjusted return. It’s not cheap, with an MER of 1.85% for the advisor series. However, in a fee-based account, costs are a bit more reasonable, coming in at 1.16% for the F series.

I like the space and I particularly like this fund. But be warned, this is not a money-market substitute, nor is it a replacement for traditional fixed-income. Instead, it is best used as a piece of a well-diversified portfolio to complement the more traditional asset classes and to diversify risk in a portfolio.

IA Clarington Floating Rate Income Fund
Fund company: IA Clarington Investments
Fund type: Floating Rate Loan
FundGrade Rating: C
Style: Bottom-up Credit
Risk level: Low-Medium
Load status: Optional
RRSP/RRIF suitability: Good
Manager: Jeff Sujitno since November 2013
MER: 1.84%
Fund code: CCM9940 (Front-end load)
Minimum investment: $500


Source: Fundata Fund Profiler, as at Feb. 28, 2018

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

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.

 

 
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