Investors who continue to search for yield in a zero interest rate environment may have finally found a solution in 2013: bank loan funds. Investors have poured nearly USD15bn into bank loan mutual funds in the first quarter of 2013, according to Morningstar.
But as quantitative easing continues and high yield bonds remain under pressure, will bank loans be the next victim of yield compression?
Mark Okada (pictured), co-founder, chief investment officer of Highland Capital, and its mutual fund affiliate, Highland Funds, disagrees. Now may be the best time to invest in the asset class, he says.
Okada, a pioneer in the development of the tradable bank loan market with more than 25 years of credit experience, can address –
• The relative overpricing of high yield junk bonds:
◦ At the end of Q1 2013, the average price of the underlying securities within the iBoxx $ Liquid High Yield Index was USD108.
• The investing edge senior bank loans offer over junk bonds and why they are especially good for those in or near retirement, including:
◦ Higher credit protection and less interest-rate risk compared with high-yield corporate bonds
◦ Greater protection to investors in the event of a bankruptcy. They are “senior” to all other claims against the borrower and therefore are repaid first
◦ A hedge against rising rates. Senior bank loans are floating-rate securities, so their coupons adjust with prevailing interest rates, resulting in extremely low duration and reduced interest rate risk relative to other fixed income securities
◦ Lower correlation to the broad-based equity and fixed income markets
Okada is responsible for structuring one of the industry’s first arbitrage CLOs and was actively involved in the development of Highland’s bank loan separate account, ETF and mutual fund platforms.
Okada is a director of NexBank, chairman of the board of directors of Common Grace Ministries, and is on the board of directors for Education is Freedom.