Bank Loan Funds

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ralph124cf
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Bank Loan Funds

Post by ralph124cf »

What is the consensus of this board about bank loan funds, either the ETF version or closed end fund? I am looking for something that will make money in a rising interest rate environment, and TIPs are overpriced in my opinion. I am willing to take substantial risk with a percentage of my cash, but I am wondering if funds such as EVV and BKLN are fairly priced for the risk.

Would this be higher or lower risk than a junk bond fund?

Ralph
Fundhunter
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Re: Bank Loan Funds

Post by Fundhunter »

My wife holds a small position in Fidelity's bank loan fund, FFRHX. Expense ratio is .71%, lower than most. It is more conservative than most, per the Morningstar report.

We would also like to know the Boglehead consensus opinion this type of fund as part of a fixed income allocation. I know that the general opinion is negative for high yield junk bond funds, which are thought to behave more like equities than high quality bonds.
Last edited by Fundhunter on Mon Feb 27, 2017 11:59 pm, edited 1 time in total.
honduranhurricane
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Re: Bank Loan Funds

Post by honduranhurricane »

I use LSFYX, 5x morningstar rating, 80bps fee. yield in the 5% range.

Loan funds should be lower risk than HY bond funds since they are higher up in the capital structure and usually secured by tangible assets ( should be better recovery in a default scenario). But in a panic environment, these funds get hammered along with other non-treasury securities. I am sure others can provide the details.

I am a big fan of loan funds for similar reasons you are looking at them, potential to gain in a rising rate environment among other reasons.
Trader/Investor
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Re: Bank Loan Funds

Post by Trader/Investor »

Bank loan funds are junk bonds lite. They are last year's story as every Tom, Dick, and Harry rushed into them late in the year for fear of rising rates. So what happens when there is such a consensus? This year they are a lagging. I had been 100% in BXFYX - one of the better bank loan funds out there - but this year have moved to 100% junk corporates - IVHIX and MNHYX. Yes, I agree, as all the pundits have been saying for the past six months and longer junk corporates are ridiculously overpriced. But the market hasn't paid any heed as it's one all time high after another this year in the Merrill Lynch High Yield Master II Index - the proxy for the junk bond market. As always, I have them on a short leash. You might want to read Barron's magazine February 11 about the hidden risks in bank loan funds and why they may not be the sure thing so many think they are.
lack_ey
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Re: Bank Loan Funds

Post by lack_ey »

Well, rapidly rising rates could be bad for bank loans with respect to credit risk, if companies have trouble paying the higher rates. And typical rising rates are already priced into the bond market overall. Depends on which part of the bank loan market you're looking at, I guess.

If you want to venture out to sub-investment grade, regular junk bonds in general should not be particularly sensitive to FFR and Treasury yields going up anyway. Properties can change with the environment but at least in many times and especially recently there's not been much relationship there. Even if you want to go with bank loans because you can't stomach stocks and high quality bonds, I don't think it makes sense to go heavily into a relatively narrow category like bank loans.

There are too many issues in closed-end funds, and you never know if a category is going to become toxic and you'll have basically zero buyers for whatever CEF you're using that probably charges too much and has stunk lately.

Speaking of credit risk, there's also the various P2P lending platforms. There's both risk in terms of the underlying loans as well as of the platforms themselves.

As for another idea, it's possible commodities futures funds could make a strong comeback, especially if there's overheating growth and strong demand in your rising rates scenario. You did say you were willing to take substantial risk. You have to be okay with the expenses and negative carry here though, now, and it's not obvious which fund/strategy and representation of commodities you should use. There are a wide range of options with significantly different weightings and roll strategies.

There's also plain-old ultrashort or floating-rate bond funds that are investment grade, but the return is unlikely to blow your socks off and you're still talking about some credit risk.

But sometimes it's cash that's actually the best.

Note: I don't particularly recommend any of the above or significant market timing/watching of investments.
J295
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Re: Bank Loan Funds

Post by J295 »

Have always owned a modest amount in an otherwise fairly conservative allocation. We are comfortable with the risk. Own the Fido version.
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whodidntante
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Re: Bank Loan Funds

Post by whodidntante »

honduranhurricane wrote:
Loan funds should be lower risk than HY bond funds since they are higher up in the capital structure and usually secured by tangible assets ( should be better recovery in a default scenario).
If you look at what happens when companies go bankrupt, very often they get "cleaned out" of assets before filing. So the standard advice that corporate bonds are safer than corporate stocks in event of bankruptcy often isn't true in practice. The pie may have already hit the floor, and have been carried off by ants. It could be that the collateral has been devalued by the company crumbling around it, but that would depend on the situation.
honduranhurricane
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Re: Bank Loan Funds

Post by honduranhurricane »

If you look at what happens when companies go bankrupt, very often they get "cleaned out" of assets before filing. So the standard advice that corporate bonds are safer than corporate stocks in event of bankruptcy often isn't true in practice. The pie may have already hit the floor, and have been carried off by ants. It could be that the collateral has been devalued by the company crumbling around it, but that would depend on the situation.

That can happen in some cases, but I would not say very often, or even often. Over time, recovery rates on HY loans has been a little below 70% vs HY bonds around 40%, with default rates on HY bonds mid single digit and default rates on loans a point or 2 below that. Granted there can be periods where both recovery and default rates go up/down, those have been averages over time. Recovery/ default rates can differ by industry (energy has been a naughty boy over the past couple of year with much lower recovery rates), really reinforcing the need for diversification.

The cases where securities holders get wiped out grab headlines (and are painful if one has held on until the bitter end), but, as the data indicates, that has not been the norm in the loan/bond recovery process. Of course that could change over time. Among other places, Moody's publishes data on recovery/default rates for loans & HY bonds.
Valuethinker
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Re: Bank Loan Funds

Post by Valuethinker »

ralph124cf wrote:What is the consensus of this board about bank loan funds, either the ETF version or closed end fund? I am looking for something that will make money in a rising interest rate environment, and TIPs are overpriced in my opinion. I am willing to take substantial risk with a percentage of my cash, but I am wondering if funds such as EVV and BKLN are fairly priced for the risk.

Would this be higher or lower risk than a junk bond fund?

Ralph
I think Larry Swedroe has posted here and written (negatively) about these. He is a former credit analyst.

My own thought is that generally you avoid, except when it's really hitting the fan and risky credit has blow out spreads over safe credit. *Then* if you are brave (I am not) there is money to be made.

The rest of the time, your risk and your return will be efficiently priced *and* this would not be a tax efficient investment in a taxable account.

It's worth reflecting how much money has been lost in financial markets chasing higher interest rates/ yields. Answer: a lot, over time.
feh
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Re: Bank Loan Funds

Post by feh »

I've held SAMBX for about 4 years. Dividend usually between 4 and 5 percent. This holding is only about 10% of our fixed income.

When the economy is doing or expected to do well, they outperform intermediate bonds. When the economy looks dicey (early 2016, 2008), total return is worse than intermediate bonds.
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billyv
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Re: Bank Loan Funds

Post by billyv »

In my experience a good place to go for bond investing ideas is the PIMCO blog. Look for any interviews with PIMCO CIO Dan Ivascyn, who replaced bond guru Bill Gross and, by all accounts, is doing even better than his old boss. Here's the link: http://bit.ly/2mRitPZ
Swelfie
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Re: Bank Loan Funds

Post by Swelfie »

Another option is FLRN (Investment grade floating rate bond etc). Brings the credit risk down but still is resilient to a rising rate environment.

Personally, I think that a small investment to bank loans, taken on the equity side, is an okay diversified. For FLRN I'd also go small but I'd be more willing to shift a bit of fixed income into it. I wouldn't take large positions in either, I'd just hold a bit for diversification. In a market panic I'd expect all 3 to fare poorly as they are all taking equity-like risk. But in a weak falling, but not panicking market they may add some diversification benefits.

I hold about 2.5% in FLRN personally, and another small percentage in high yield bonds (ANGL). But I'm not prepared to go higher than that because of the equity like risk and the fact that I believe in equities much more over the long term.
feh
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Re: Bank Loan Funds

Post by feh »

feh wrote: Tue Feb 28, 2017 9:38 am I've held SAMBX for about 4 years. Dividend usually between 4 and 5 percent. This holding is only about 10% of our fixed income.

When the economy is doing or expected to do well, they outperform intermediate bonds. When the economy looks dicey (early 2016, 2008), total return is worse than intermediate bonds.
I sold our shares of SAMBX a couple weeks ago, for a couple reasons:
  • total bonds is now yielding something acceptable to me
  • recession or fear of recession will hurt the NAV of bank loan funds
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