Bank loans are in the sweet spot

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BUTIf interest rates fell in 2019 and 2020, investors paid little attention to bank loans. But the economic recovery and the likelihood of an increase in short-term interest rates are the main conditions for these loans, which pay an interest rate that adjusts every few months to match the benchmark for short-term bonds. When the yield rises, the prices of most bonds fall. But bank loans, often called floating rate loans, retain their value.

Managers in High income floating rate Fidelity (FFRHX), Eric Mollenhauer and Kevin Nielsen, conduct a detailed analysis of each company before adding a bank loan to the fund.

Bank loans are usually issued to firms that have an undesirable credit rating (from double B to triple C). This means they have a higher risk of default, which is why Mollenhauer and Nielsen are right in being picky. Together with 20 analysts, each of whom is an industry specialist, the managers form a diversified portfolio, one loan at a time, based on the company’s prospects for the next two to three years.

High income floating rate has a reputation for being a more conservative company than its peers, and tends towards firms with a double B rating, the highest in high-yield credit ratings. This is still true, but lately the fund has been holding more of its assets than usual in single-B loans.

It’s worth the risk these days.

“With the flexibility of the Federal Reserve System, deferred demand and the potential for a large infrastructure package, our companies are well tuned,” says Nielsen. Currently, the fund has decent positions in hotels and entertainment companies. Street gear retailer Bass Pro Shops leads the way.

Regional firms once dominated the bank lending market, but since 2008 it has more than doubled to $ 1.2 trillion – the same as the high-yield bond market, Mollenhauer says. Companies are looking for this kind of financing because loans offer flexibility. They are short-term, with an average maturity of less than five years, and loans can be repaid at the discretion of the borrower. Many well-known names are now filling the market, including Caesars Resorts and Charter Communications (CHTR).

Since Mollenhauer came to power in 2013 (Nielsen joined him in 2018), the fund’s annualized 3.5% return has been higher than that of a regular bank loan fund, but below the benchmark S&P / LSTA Leveraged Loan index. The fund’s return is 3.03%.

Table for bank and loan funds

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.

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