Idea Of The Week: Franklin Floating Rate Fund is the Fund That Wants Warsh to Hike!

• The fund has an effective duration of only 0.10 years and an average interest rate reset period of 60 days. Each time the Federal Reserve raises interest rates, the portfolio's coupon rate resets upwards within approximately two months, gradually increasing the portfolio's coupon income.
• The average coupon rate is 6.36%. Based on the net asset value at the end of August and the latest monthly dividend, the annualized dividend yield is approximately 7.2%, making it a rare choice in the market that combines high cash flow with low interest rate sensitivity.
• The fund's greatest risk stems from the credit quality of its assets: the average credit quality is only B+, with B and below accounting for 64.7% of the portfolio; the past year's return was 2.94%, lagging the benchmark by 1.85 percentage points, reflecting the significant impact of a single default event.

After Federal Reserve Chairman Kevin Warsh reiterated at the Jackson Hole meeting in late August that inflation was the top priority, market expectations for interest rate hikes surged. The Consumer Price Index (CPI) rose 3.4% year-on-year in August, while the Producer Price Index (PPI) soared to 5.4%, with gasoline prices surging over 27% year-on-year. Although core inflation fell to 2.4%, this was insufficient to convince the authorities. Following the FOMC meeting on September 16, Warsh announced a 25 basis point rate hike, raising the interest rate range from 3.50%–3.75% to 3.75%–4.00%, marking the second rate hike since the surge in interest rates in 2022. In fact, the market anticipates one more rate hike by the Fed this year, indicating that the rate-cutting cycle has effectively ended.

Faced with rising interest rates, investors can either shorten their investment horizon or directly hold floating-rate assets to avoid interest rate risk. Franklin Floating Rate A (dis) USD (hereinafter referred to as the "Fund") introduced in this article is a tool for turning interest rate changes from risk into return.

Basic Information

Established in 2000 and managed by Franklin Advisers, the fund primarily invests in senior secured loans with floating interest rates—the highest tier of debt in a company's capital structure secured by specific collateral. As of the end of August 2026, the fund had approximately USD 370 million in assets, holding 296 investments, paying monthly dividends, and is tradable every Hong Kong trading day. Its benchmark is the Morningstar LSTA US Leveraged Loan Index.

Regarding investment mandates, the fund must invest at least 80% of its assets in floating-rate loans and securities, with at least 75% rated B- or higher, and a maximum of 25% allowed to be below B-. An additional 20% may be allocated to second liens, subordinated or unsecured debt, and fixed-rate bonds.

The fund's extremely short duration provides protection against interest rate risk

The fund's weighted average maturity is 4.23 years, but its effective duration is only 0.10 years; this difference is the essence of floating-rate loans. The loan coupon is linked to the Secured Overnight Financing Rate (SOFR), meaning that when interest rates rise, the coupon increases accordingly, thus minimizing the impact of interest rate changes on the price. The portfolio's average interest rate reset period is 60 days, implying that a 25 basis point rate hike will be reflected in the coupon within approximately two months.

The fund is primarily exposed to credit risk

While floating interest rates offer protection against interest rate volatility, credit quality risk warrants attention. The portfolio's average credit quality is B+, with B-grade accounting for 59.5%, CCC and below totalling 5.2%, and investment grade (BBB) ​​at only 2.2% (see Table 1). According to Franklin Advisers, 83.5% of the fund's assets are non-investment grade or unrated. In terms of sectors, besides "bank loans" (20.5%), technology/information systems rank second at 13.4%, followed by finance and services at 9.9% and 8.9% respectively (see Chart 1). The holdings are highly diversified, with the largest single issuer, UKG (software industry), accounting for only 1.6%, and the top ten holdings totalling approximately 13.5%. This indicates that the fund's diversification helps reduce single-issuer risk; however, overall credit cycle risk still exists.

Table 1: Credit Rating Distribution of the Fund

Rating	Weighting
BBB	2.2%
BB	22.6%
B	59.5%
CCC	4.9%
CC	0.3%
No Rating	1.5%
N/A	2.4%
Cash Reserve	6.8%
Data Source: Fund Factsheet, iFAST compilations Data As Of 31 August 2026

Chart 1:   Industry Distribution of the Fund 

The fund's Performance lagged benchmark, but showed strong resilience during slumps

 As of the end of August, the fund's one-year return was 2.9%, compared to the benchmark's 4.8%. Its three-year and five-year annualized returns were 6.1% and 5.6% respectively, also slightly lower than the benchmark's 7.3% and 6.3% (see Table 2). Notably, the one-year return was below the average coupon rate of 6.36%, with the entire difference stemming from price losses. While the fund have indeed underperformed, the reasons are understandable.

Table 2: Comparison of Return of the Fund and Benchmark (%)

	TTM	3Y Annualised	5Y Annualised	2025	2024	2023
The Fund	2.9	6.1	5.6	4.3	7.2	15.0
Morningstar LSTA Leveraged Loan Index	4.8	7.3	6.3	5.9	9.0	13.1
Data Source: Fund Factsheet, iFAST compilations Data As Of 31 August 2026

We believe the primary reason is auto parts supplier First Brands. The company filed for bankruptcy protection on September 29th last year, and subsequent scandals revealed that the fund held five loans totalling approximately USD 8.1 million in principal, valued at only $240,000 at the end of January, representing about 3% of the face value. This alone is equivalent to approximately 1.9% of the fund's net asset value, similar to its underperformance compared to the benchmark over the past year. This illustrates that, within a portfolio with average high returns, we believe First Brands is not the only individual case of default at this rating, and investors should be more cautious about individual credit events rather than the impact of interest rate fluctuations.

Compared to our peers in USD bond funds on our platform, this fund has demonstrated defensiveness during past bond market downturns. Aside from the sharp drop in asset value caused by the credit crisis following the 2020 pandemic, the fund has not only avoided declines like its peers during past interest rate hike cycles but has even recorded positive returns (see Chart 2). With the new Federal Reserve Chairman Kevin Warsh announcing interest rate hikes and maintaining the possibility of further rate increases, the fund can provide investors with interest rate risk protection through its ultra-short term and floating interest rate.

Chart 2:  Comparison of fund resilience against slumps with peers