Dear Mr. Berko: Last May, you told my husband not to invest $40,000 in the Class A shares of the Franklin Income Fund, telling him that FKINX was “very risky.” We partially took your advice and invested $20,000 at $2.44 a share because the yield was 4.8 percent. Now the fund is down by 30 cents a share, to $2.14, and we’ve lost almost $2,500 on what we thought was a safe investment. We would like to invest the remaining $20,000 in that fund if you think it could go down to $2 a share, which would give us a 6 percent yield on our second $20,000 and a 5.4 percent yield on our total investment. What do you think?
— I.G., Detroit
Dear I.G.: You’ve gotta be dumber than a herd of androgynous wombats to buy an open-end fund and pay a 4.25 percent commission. Unlike the case with a common stock, buying FKINX when it falls in price is unwise because the momentum of its $83 billion portfolio acts like a riptide. Realizing that Federal Reserve Chairwoman Janet Yellen is looking for an excuse to raise interest rates, I’m likelier to recommend that you sell FKINX.
I’m loosely familiar with Sir Isaac Newton’s observations in “Philosophiae Naturalis Principia Mathematica,” particularly the notion that what goes up must come down. However, I’m more concerned with Murphy’s Law and its relationship to Newton’s law of universal gravitation: “When something comes down, it won’t come down where or when you expect it to come down, unless you don’t expect it to; at that point, it will.” And frankly, I haven’t the foggiest idea whether FKINX will reach $2.
FKINX, run by Ed “Fast Eddy” Perks, is an $83 billion open-end fund, and among its largest holdings are the oil stocks of Royal Dutch Shell, BP and Chevron. Fast Eddy’s FKINX also owns $27 billion in high-yielding (junk) bonds, more than any other mutual fund I know. A lot of Fast Eddy’s junk is so thinly traded (illiquid) that — based upon the average trading volume during the past year — it may be terribly difficult to sell, and that’s scary. Fast Eddy also owns a big batch of oil patch bonds that have been clobbered by low oil prices — Linn Energy, Halcon Resources, Energy XXI and others currently trading at 50 to 75 percent discounts to par, some with current yields over 35 percent. Last August, disappointed investors took $1.5 billion out of FKINX, which, except for one in 2008, was the largest pullout in its 67-year history. And more may pull out when FKINX reduces its dividend next year.