American Century Investments is not a new name to either mutual funds or exchange-traded funds. In fact, American Century was among the first to embrace active non-transparent (ANT) structures to help run its ETFs -- the same technology used in a fund I reviewed recently. The firm's fund lineup has a good mix of equity and fixed income offerings and a recent launch has added to the diversity of available fixed income products: American Century Multisector Floating Income ETF (FUSI) .
What caught my eye was the fund's use of floating-rate debt. Let's take a look.
FUSI
This fund is an actively managed product and is run by a subset of the same portfolio management team that helms the American Century Multisector Income ETF. The investment objective is stated as income seeking with a secondary goal of long-term capital appreciation. The fund prospectus describes the strategy as using "a sector rotation approach that integrates macroeconomic inputs, technical analysis of the relative value among various sectors, and fundamental research on individual securities."
The document goes on to state that the portfolio will be composed of "securitized credit instruments, including collateralized loan obligations, credit risk transfer securities, floating rate commercial mortgage securities, and mortgage- or asset-backed securities."
Overall credit quality is targeted at investment grade but managers can allocate up to 35% of the portfolio to below investment grade, or "Junk bonds." Hedging is also allowed through the use of futures contracts or credit default swaps.
While the fund is actively managed and does not track an index, it is benchmarked to the Bloomberg U.S. one-3 month Treasury Bill Index for performance purposes. The fund will make distributions on a monthly basis.
Floating Rate Debt and 144A
Unlike much of the fixed income marketplace, floating rate debt as advertised does not have a static coupon payment throughout the life of the bond. Rates on these bonds are usually tied to the shorter end of the yield curve. This allows coupon payments to fluctuate over the life of the bond. An added benefit to this variable rate structure is that interest-rate sensitivity, or duration, tends to be lower. The prospectus states that the fund's duration is expected to be less than one year, which, from eyeballing the current holdings, is a lot lower than the overall maturity of the non-Treasury note holdings. These bonds can adjust their rates and by extension, their coupon payments to better reflect the current interest rate environment, which in turn doesn't have as large an impact on the price investors are willing to pay for that bond. In a rising rate environment, floating rate bonds are generally viewed as good, because not only do coupon payments rise with rates (although with some delay), but floating-rate bond prices don't see the kind of markdowns that fixed rate bond prices see as rates rise.
Looking through the fund's latest holdings, there are just under 60 names, and aside from the U.S. Treasury notes and the cash sweep vehicle, everything else is tagged as "144A." 144A securities have always been interesting because, while there are accredited investor rules that cover access to certain investments, even 144A issues are off-limits to individual investors. Buyers of these private placements must be Qualified institutional buyers. The securities themselves come with minimum holding periods (six months to a year) and strict rules concerning the number of shares of a security that can be sold at any given time in relation to overall sales in the market. (If you're interested in going down a small 144A rabbit hole, this is a good place to start.)
Wrap It Up
With a 27-basis point expense ratio resulting in $2.70 in annual fees given $1,000 invested over a calendar year, FUSI is more expensive than a basic money market fund, but I expect that with an average weighted coupon that I calculated to be roughly 5.5%, those extra basis points might just be worth it. FUSI isn't the first to market with this strategy, but given Fed Chair Jerome Powell's recent comments, it seems like this fund might be worth a closer look.
