I got this reply from Fidelity when I asked why its dropping so fast, until today that is, yippee.
Thank you for your email and for your concern regarding the performance of the Fidelity Floating Rate High Income Fund (FFRHX) We certainly understand your concerns regarding performance in this fund. Please understand, however, that this fund invests primarily in floating rate loans, which are often lower-quality debt securities, and other floating rate debt securities. The sub prime mortgage problems from last fall have been detrimental to this market as a whole. Further, the volatility in the Net Asset Value (NAV) since last summer demonstrates that this high-yield fund is not a constant $1 NAV product like a money market fund, whose credit quality and maturity are both constrained by SEC rules to prevent NAV fluctuation.
In comparison, similar NAV volatility for both the fund and its index shows that the volatility is largely market-driven, and not unique to the fund. The effect of the continuing credit crisis and an overhang in supply tend to lower the market value of these types of securities in general.
In addition, please know that the NAV decline is not the result of defaulted securities within the Fidelity portfolio. Further, the portfolio managers strategy for dealing with a slower domestic economy, inflation pressures and the supply overhang includes emphasis on companies characterized by, for example, export opportunities, rich assets, leveraged but improving balance sheets, and underweights on consumer/housing-dependent sectors until the fundamentals improve.
Even with this ongoing NAV volatility, Lipper Rankings as of January 31, 2008 show FFRHX as number 6 out of 66 Loan Participation Funds in the 1 year category, and as 8 out of 23 Loan Participation Funds in the 5 year category.
I receied exactly the same response from Fidelity that you posted here. It seems that Fidelity has resorted to "form letters" that say absolutely nothing. What they carefully avoided telling us is that there has been a run on this fund -- over $2 billion in redemptions, forcing the fund's incompetent manager to sell the fund's paper at a loss or at a deep discount, causing that precipitous decline in NAV. Fidelity needs to find competent fund managers. The one running this one is definitely not one.
Thanks Danny for posting this. I see it as more Pablum/spin from Fidelity. But there is an element of truth. I don't think it's as much as an oversupply of junk notes as it is lack of liquidity in the market i.e. no demand. What does one do when they can't sell something? They lower the price until someone steps forward with an offer. The WSJ article the other day does a terrific job of explaining this. The market for these notes has dried up in light of the sub-prime fiasco. It's a risk/reward situation. Is the additional default risk associated with junk notes worth the marginal additional return? The marketplace says "no", at least for now. That's why the value of these notes has declined precipitously, No one wants them. Today may have represented some semblance of stability returning to this sector. Maybe the price has gotten so low as to have created a market i.e. at these rock bottom prices, some buyers may have surfaced. Or maybe Fidelity has taken some steps to prop up the fund. That would be just fine with me. Does that mean the fund has hit bottom? I don't know. But it has to happen eventually. It can't and won't go to zero. I hope today is the day.
If I remember from my previous reply, I think I said the drop was not from defaults (<1%) but rather than the resale price of the paper. As long as the dividend/cash flow remains constant, the investment is viable. As far a renegotiation of the floating rate, sure, it has always been a factor. I believe the biggest drop has been the spread between the safest income product (T-bills/notes) and the more speculative products (FFRHX). As confidence in the ability to cover the interest payments grows, the spread should narrow and the the NAV should rise accordingly. The real question is whether the shrinkage in the spread can overcome the drop in floating rates.