Best Funds to Buy as Interest Rates Rise

NEW YORK (TheStreet) -- Interest rates have nowhere to go but up, says Robert Dial, manager of the MainStay Floating Rate Fund (MXFAX). That's why he advises investors to allocate assets to floating rate securities that periodically adjust their payouts.

The mutual fund has returned 6.5% in 12 months, according to Morningstar ( MORN). Over the past five years, the fund has returned an average of 4% annually, outperforming three-quarters of its Morningstar peers.

Welcome to TheStreet's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

Why is now a good time to own a floating rate fund?

Dial: Right now, interest rates are at all-time lows and so, if interest rates can only go up, you want to be in something that floats. This fund holds at least 80% floating rate loans, so it is perhaps the best way to benefit in a rising-rate environment.

What will happen to the bond market when Federal Reserve Chairman Ben Bernanke stops buying Treasuries this summer?

Dial: We will have a period of three to six months of settling out. The Fed is not going to raise rates so soon after they pumped all this liquidity into the system. Yet, we see lots of signs of inflation in the economy right now, which suggests that in the not-too-distant future, they will be forced to raise rates to tighten.

What makes renal-care provider DaVita (DVA) a good floating rate issue to own?

Dial: We like this issue and we like this company. They have a steady cash flow profile. The people who need this service need it for a long time and on a regular basis. They can't live without it. And the reimbursement environment is a little less severe than in other parts of the health-care environment. Plus, this issue has a pretty good yield for the rating.

You are also invested in Aramark, which went public, then was taken private again. Why are these bonds attractive?

Dial: We like the debt of Aramark because of the cash flow profile of the company. It's a very steady cash flow profile. They do food service for colleges, businesses and stadiums, so it tends to be a pretty steady performer. It's not the juiciest yield in the portfolio but it's a good "sleep well at night" holding and that's why it's one of the largest portions in our fund.

You also own the chemical company Ineos. What is attractive about this issue?

Dial: Ineos and the chemical industry, in general, took a real hit when the economy unraveled a few years ago. We like the operating metrics of this business. We bought more when the economy fell off. It's shown a tremendous price appreciation in our fund, really showing alpha. Plus, it has a very rich coupon. Sadly, its nearing its maturity date and is likely to be called away. But I'm sure we will find something good to replace it.

-- Reported by Gregg Greenberg in New York.

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