Bank loan

Bank loan funds are in an ideal position

As interest rates fell in 2019 and 2020, investors paid little attention to bank loans. But an economic recovery and the likelihood of higher short-term interest rates are key conditions for these loans, which pay an interest rate that adjusts every few months based on a bond benchmark at short term. When yields rise, most bond prices fall. But bank loans, often called variable rate loans, hold their value.

The managers at Fidelity Floating Rate High Income (FFRHX), Eric Mollenhauer and Kevin Nielsen, perform a detailed analysis of each company before adding a bank loan to the fund.

Bank loans are generally granted to companies that have questionable credit ratings (double-B to triple-C). This means they have a higher risk of default, so Mollenhauer and Nielsen are right to be selective. With 20 analysts, each industry specialist, the managers build a diversified portfolio, one loan at a time, based on a company’s outlook over the next two to three years.

Floating-rate high-income securities have a reputation for being more conservative than their peers, favoring companies rated double-B, the higher end of high-yield credit ratings. That’s still true, but lately the fund is holding more of its assets than usual in B-rated loans.

These days, it’s a risk worth taking.

“With a dovish Federal Reserve, pent-up demand and the potential for a big infrastructure package, our businesses are well established,” Nielsen said. The fund currently has a decent exposure to hotels and leisure companies. Outdoor equipment retailer Bass Pro Shops is the main holding company.

Regional companies once dominated the bank loan market, but since 2008 their size has more than doubled to $1.2 trillion, the equivalent of the high-yield bond market, according to Mollenhauer. Businesses seek out this type of financing because the loans offer flexibility. They are short-term, with an average maturity of less than five years, and the loans can be repaid at the borrower’s discretion. Today, many household names fill the market, including Caesars Resorts and Charter Communications (CHTR).

Since Mollenhauer took over in 2013 (Nielsen joined in 2018), the fund’s 3.5% annualized return has beaten the typical bank loan fund, but lagged the benchmark. , the S&P/LSTA Leveraged Loan Index. The fund yields 3.03%.