Fidelity Advisor Floating Rate Fund Commentary – Q3 2021
Thesis
FIQSX (currently yielding 2.98%) is a large floating rate fund that has a strong historical returns and a tenured management team. By investing purely in senior bank loans, FIQSX further increases our potential upside gain, reduces our duration-risk, and decreases our interest rate risk. We like that the fund utilizes a bottom-up investment process through proprietary framework analysis, avoids high-yield corporate bonds, and allocates to relatively higher-rated securities within the floating rate security space.
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Overview
In the third quarter of 2021, FIQSX performed roughly in line with the benchmark (S&P/LSTA Leveraged Loan Index). The fund’s core bank loan portfolio performed roughly in line with the benchmark. Security selection in oil & gas contributed most to returns. In general, loans outpaced high-yield corporate bonds, investment-grade corporate credit, and broad investment-grade fixed income securities. Almost all industries contributed to returns, along with CLOs which continued to be a substantial source of loan demand.
Q3 2021 Summary
- FIQSX returned 1.10%, while the Leveraged Loan Index returned 1.14%
- Quarter-end effective duration for FIQSX was 0.08 and 0.07 for the Leveraged Loan Index
- Largest contributors
- California Resources and Chesapeake Energy (oil & gas equity), Murray Energy (coal mining equity)
- Largest detractors
- Denbury (energy E&P equity), Envision Health (loan business)
Optimistic Outlook
- We hold this fund due to its relatively high yield and shorter duration, especially as we believe that rates will increase in the coming years
- Improvement in leverage loan default rate (down to 0.89%)
- Finding attractive opportunities in new-issue market
- Large overweight in lodging & casinos, retailers, and oil & gas
- Large underweight in health care, electronics/electrical, and automotive
- Continue to hold an overweight to BBB & above and BB rated loans, and underweight to B and CC & below rated loans
- Expecting to see continued GDP, corporate cash flow, and earnings growth
[Category Mutual Fund Commentary]
Micah Weinstein
Research Analyst
Direct: 617.226.0032
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109