Online Extra: Steady Income Wins the Race

The co-managers of Fifth Third Strategic Income Fund explain their strategies and goals for the $160 million fund

By putting the word "income" in their name, plenty of funds suggest that they'll be paying a regular income stream to shareholders. But the truth is that few funds deliver much in terms of yield. That's not the case with the Fifth Third Strategic Income Fund (MXSFX ). The $160 million fund, which is A-rated by BusinessWeek in the domestic hybrid category, yields about 4.4%. Personal Business Editor Lauren Young recently spoke to Co-Managers Jeff Krumpelman and Peter Kwiatkowski. Edited excerpts of their conversation follow:

What's the fund's investment strategy?

Kwiatkowski: Our primary objective is to provide a steady income for shareholders. So we look investments that will keep that as steady as possible. In a rising rate environment we expect to raise the income level of the fund as well. But the amount we pay out isn't volatile -- we try to keep it steady.

One of the big advantages of our fund is that it has a lot of different asset classes in it, and they are usually pretty uncorrelated with each other.

Where do you find income?

Krumpelman: It's getting more challenging. We don't have much straight common equity -- less than 10% of the fund is in stocks. We have also used preferred stocks and REITs.

Kwiatkowski: We've gone to foreign bonds in some cases, and we've also used mortgage bonds in the past. With the absolute low level of rates and with a flat yield curve -- short or long you're getting the same yield -- we are not getting paid a lot to go out [into] longer maturities.

We will not compromise quality of fund to chase yield at this point. We are moving up in credit quality. We don't use leverage in the fund. If any market dislocations occur, we'd hope the fund would manage that fairly well.

How have you positioned the fund in recent months?

Krumpelman: One of our main moves in the past 12 months was to take the allocation in preferred stocks down modestly, even though they are a great income-producing security. They are pretty richly valued.

With the focus on quality, we've added to bond exposure. We also shortened duration just a little bit, and we added more floating-rate-type securities in recognition that the Fed has been in a tightening cycle. It does seem the market underestimated how far the Fed might go. We've also moved away from high-yield.

What about REITS?

Kwiatkowski: REITs look a little bit expensive at this point. They continue to perform well as an asset class. Of course, the biggest thing we worry about when it comes to REITs is rates. But we still continue to hold some REITs among our top holdings, including Kimco (KIM ).

Edited by Patricia O'Connell

    Before it's here, it's on the Bloomberg Terminal.