For conservative investors seeking protection of principal, FPA New Income Fund (FPNIX) should be on the top of the list. Think back to the dark days of the last financial crisis. Some bond and fixed income prices were being hammered along with equity prices. FPA New Income, on the other hand, was doing its job of principal protection.
Below is a pie chart of its current portfolio:
Morningstar offers the following chart of the value of $10,000 invested in FPNIX and in nontraditional bond index, the classification for FPNIX. FPNIX did not experience a loss nor cut its distribution when it was common for peers to do so. The graph covers the period from Nov. 30, 2007 to Jan. 4, 2013. FPNIX is in blue and the index is in orange.
The fund’s website offers an interest recap of their investment approach:
Objective: The primary investment objective of FPA New Income, Inc. (FPNIX) is current income and long-term total return. Capital preservation is also a consideration.
FPA New Income, Inc. seeks to generate a positive absolute return through a combination of income and capital appreciation. To achieve this goal, we employ a total return strategy using investments in fixed income securities that focus on income, appreciation and capital preservation. Market opportunity will dictate emphasis across these three areas.
Philosophy: We do not like to lose money!
In order to do this we adhere to the following principles: Absolute value investors. We seek genuine bargains rather than relatively attractive securities.
From a Morningstar review:
This fund is very well-suited for investors seeking a safe haven, but investors looking to participate in bond-market rallies should look elsewhere.
FPA New Income’s absolute returns have lagged most of its peers, but the fund’s Morningstar Analyst Rating of Silver is based on the fund’s low volatility and strong risk-adjusted returns.
The fund isn’t necessarily designed to best its category though, as its ultra-conservative positioning is better suited for investors looking for a safe haven against bond-market sell-offs, rather than those looking for upside during fixed-income rallies. For example, the fund’s short duration helped shield it from losses during 2013’s taper tantrum and contributed to its 4.3% return in 2008 while many nontraditional bond funds posted losses that year. Low volatility is also a hallmark of the fund and its Positive performance rating is based on long-term Sharpe ratios that top not only its nontraditional bond category but also the intermediate- and short-term bond categories.
Despite a conservative bias, the fund finds opportunities in areas with unique risks. Recent examples include loans to mortgage servicers who are purchasing and working out distressed mortgage pools; and interest-only bonds structured from pools of GNMA project loan IOs. High-yield corporate bonds also make up 10% of assets.
The goal of safe-haven positions in a portfolio is to generate the maximum protection against loss of principal. Since its founding in 1984, FPNIX has historically accomplished this important goal.
FPNIX offers a current yield of 2.8%, in line with 30-yr bond yields of 2.69%. FPNIX offers long treasury yields with less than 1/10th of the interest rate risk of long bond funds and 1/3 of the interest rate risk of the Barclay’s US Aggregate Bond Index, based on a current duration of 1.36.
This article first appeared in the Jan 2015 issue of My Investment Navigator. Thank you for reading. George Fisher