First Trust Advisors L.P. (“First Trust”), a provider of more than 200 investment products, many of which offer transparency, tax efficiency and a rules-based approach to stock selection, has launched the First Trust Short Duration High Income Fund (NASDAQ Symbols: FDHAX/FDHCX/FDHIX).
The First Trust Short Duration High Income Fund (“the Fund”) seeks to provide a high level of current income. As a secondary objective, the Fund seeks capital appreciation. In order to accomplish these goals, the Fund utilizes a short-duration strategy designed to maximize income and limit interest-rate risk by investing at least 80 percent of its net assets (plus the amount of any borrowing for investment purposes) in high-yield debt securities and bank loans that are rated below-investment-grade or unrated. High-yield debt securities are below-investment-grade securities, and are commonly known as “junk bonds.” The Fund may also invest in investment-grade debt securities and other debt instruments, such as convertible bonds and preferred stocks.
“Given the historically low interest rates in the present fixed-income market, investors have few options for earning attractive rates of return without incurring significant interest-rate risk,” said William Housey, CFA, Senior Vice President and Senior Portfolio Manager at First Trust, who serves as one of the Fund’s Portfolio Managers. “This Fund provides the tactical ability to navigate the below-investment-grade credit markets, including the senior loan and high-yield bond markets, by seeking the best relative value opportunities within a given capital structure. Given our preference for senior loans in today’s market, this Fund may provide investors who are searching for yield the opportunity to potentially enhance income while mitigating interest-rate risk and potentially even benefitting from future increases in interest rates.”
The combination of senior loans and high-yield bonds is expected to give the Fund’s portfolio a blended duration of three years or less, which may provide high current income while limiting price volatility associated with changes to interest rates. By investing in high-yield securities with better credit quality, the Fund’s Portfolio Managers attempt to limit potential defaults of portfolio investments.
First Trust’s leveraged finance investment team relies on a combination of a rigorous fundamental credit selection process and top-down relative value analysis to determine which piece of an issuer’s capital structure offers the best opportunity. The team conducts its credit evaluations according to a risk-managed portfolio construction methodology.
Between 1998 and 2012, high-yield bonds and senior loans generated a more favorable risk/return profile than large-cap equities, in our opinion, making the combination an ideal addition to a fixed-income portfolio. During that 14-year period, high-yield bonds provided 160 percent of the return of large-cap equities with 5 percent less volatility, while high-yield bonds with BB and B ratings generated 152 percent of the return of large-cap equities with 20 percent less volatility, according to research performed by the First Trust leveraged finance team.
Since senior loans have historically produced lower volatility than high-yield bonds, combining these two asset classes may produce a portfolio with less volatility than a portfolio that is limited to high-yield bonds. From 1998 to 2012, a portfolio with a 50/50 blend of senior loans and high-yield bonds with BB and B ratings would have generated 135 percent of the return of large-cap equities with 18 percent less volatility.
“By investing in both high-yield bonds and senior loans, our Fund can improve diversification within fixed-income portfolios,” said Mr. Housey. “Through our meticulous bottom-up credit evaluation process, investors may be able to capitalize on the best relative value opportunities from strong issuers in a variety of sectors.”
Along with Mr. Housey, First Trust Senior Vice President Scott D. Fries, CFA, and Vice President Peter Fasone, CFA, serve as Portfolio Managers of the Fund.
For more information about First Trust, please contact Chris Moon of JCPR at 973-850-7304 or firstname.lastname@example.org.
About First Trust
First Trust Advisors L.P., along with its affiliate First Trust Portfolios L.P., are privately-held companies which provide a variety of investment services, including asset management and financial advisory services, with collective assets under management or supervision of approximately $63 billion as of December 31, 2012 through unit investment trusts, exchange-traded funds, closed-end funds, mutual funds and separate managed accounts. First Trust is based in Wheaton, Illinois. For more information, visit http://www.ftportfolios.com.
A mutual fund’s share price and investment return will vary with market conditions, and the principal value of an investment when an investor sells shares may be more or less than the original cost. Before investing, an investor should carefully consider a fund’s investment objectives, risks, charges and expenses. Contact an investment professional or call 1-800-621-1675 to obtain a prospectus or summary prospectus containing this and other information. The prospectus or summary prospectus should be read carefully before investing.
High-yield securities risk. High-yield securities, or “junk bonds,” are subject to greater market fluctuations and risk of loss than securities with higher investment ratings. These securities are issued by companies that may have limited operating history, narrowly focused operations, and/or other impediments to the timely payment of periodic interest and principal at maturity. If the economy slows down or dips into recession, the issuers of high-yield securities may not have sufficient resources to continue making timely payment of periodic interest and principal at maturity. The market for high-yield securities is smaller and less liquid than that for investment-grade securities. High-yield securities are generally not listed on a national securities exchange but trade in the over-the-counter markets. Due to the smaller, less liquid market for high-yield securities, the bid-offer spread on such securities is generally greater than it is for investment-grade securities and the purchase or sale of such securities may take longer to complete.
Bank loans risk. An investment in bank loans subjects the Fund to credit risk, which is heightened for loans in which the Fund invests because companies that issue such loans tend to be highly leveraged and thus are more susceptible to the risks of interest deferral, default and/or bankruptcy. Senior floating rate loans, in which the Fund invests, are usually rated below-investment grade but may also be unrated. As a result, the risks associated with these loans are similar to the risks of below-investment grade fixed income instruments. An economic downturn would generally lead to a higher non-payment rate, and a senior floating rate loan may lose significant market value before a default occurs. Moreover, any specific collateral used to secure a senior floating rate loan may decline in value or become illiquid, which would adversely affect the loan’s value. Unlike the securities markets, there is no central clearinghouse for loan trades, and the loan market has not established enforceable settlement standards or remedies for failure to settle. Therefore, portfolio transactions in loans may have uncertain settlement time periods. Senior floating rate loans are subject to a number of risks described elsewhere in the prospectus, including liquidity risk and the risk of investing in below-investment grade fixed income instruments.
There are other risks associated with this investment, including credit risk, interest rate risk, liquidity risk, convertible bonds risk, non-U.S. securities risk, income risk, management risk and currency risk. For complete information about these risks, an investor should consult the prospectus or summary prospectus for this Fund.
This investment may not be appropriate for all investors and investors should consult an investment professional to help determine suitability.