Fidelity Floating Rate High Income Fund (FFRHX) seeks to provide a high level of current income by investing in floating rate bank loans—also known as leveraged loans—which are issued by non-investment grade high yield companies.
Key features of this fund
- Primarily invests in floating rate loans, which are often lower-quality debt securities (rated BB and below), and other floating rate debt securities
- Invests in troubled companies or those in uncertain financial condition or with high levels of debt or leverage
- Is not a cash equivalent or obligation of a bank
- May not be appropriate for investing horizons of less than two years
Floating rate bank loans have interest rates that reset frequently. The interest rate on these securities is set as a fixed amount above a standard rate such as the London Interbank Offered Rate (LIBOR), which is a widely used benchmark for short-term lending among banks. Every few months, the interest rates on floating rate loans reset higher, or lower, to reflect changes in the benchmark. This characteristic can potentially make the securities less subject to interest rate risk than longer-term investment-grade or high yield bonds with fixed interest rates.
Like high yield bonds, high yield floating rate securities entail greater risk of loss than their investment-grade counterparts. However, since loans are senior to bonds on the balance sheet of their issuer, in the event of bankruptcy, loan-holders are repaid before bond-holders.
Things to keep in mind
The fund primarily invests in floating rate loans that are often lower-quality debt securities (rated BB and below) and thus, are risker than their investment-grade counterparts. In addition, the fund invests in companies in troubled or uncertain financial condition. While this results in a potential for high yields, there is an increased risk of default or price fluctuations due to changes in the credit quality of the issuer.
Furthermore, investments in foreign securities, especially those in emerging markets, involve additional risk such as increased political and economic risks as well as exposure to currency fluctuations.
Each of the fund's investment categories may experience periods of volatile returns, and it is possible for all investment categories to decline at the same time.