The Future of Bank-Loan Fund Investments

Posted on October 1st, 2014 at 8:12 AM

From the Desk of Jim Eccleston at Eccleston Law Offices:

Investors have been pulling substantial amounts of money away from Bank-Loan funds, floating rate bank loans sold to institutional investors and mutual funds with limited interest-rate risk but substantial credit risk since April this year, which used to be one of the most popular vehicles and collected roughly $100 billion from mutual fund investors since 2010.  The shrinking investment in Bank-Loan funds is because investors’ expectations for rising interest rates in 2014 have not been met, which made them shift bank loan fund assets into more enticing spread products such as bond funds. Most bond investors have benefitted from lower yields this year as prices for bonds have risen, but Bank-Loan fund investors don’t receive the same treatment.

In addition, the Bank-Loan funds carry more risk. According to Moody’s, M&A loans for bank-loan deals are considerably risker than junk bonds. These mega-deal leveraged loans have a default rate of 17.8% over the past five years-triple the rate of defaults for junk bonds.

Even though loan prices tend to stay stable, which appeals to many conservative investors, loan aggregate values still change substantially during difficult economic times, such as credit crisis of 2008. They otherwise show few effects from bond and stock market fluctuations.

In the foreseeable future, putting more money in the Bank-Loan market does not seem particularly prudent. 

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.

Related Attorneys: James J. Eccleston

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