DoubleLine tries new fund idea in hot sector

Dec 9, 2012 @ 12:01 am

By Jason Kephart

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(Thinkstock)

Bank loans are enjoying a resurgence, and Jeffrey Gundlach's DoubleLine Capital LP plans to join the party next year.

After being largely ignored by investors for the better part of the year, bank loan mutual funds have become hot over the past few months. Since August, the funds have taken in more than $5 billion, nearly three-quarters of their $7 billion in net inflows this year through Oct. 31, according to Morningstar Inc.

DoubleLine, no stranger to popular funds, will launch the DoubleLine Floating Rate Fund next year. It will be managed by Bonnie Baha and Robert Cohen.

The fund won't be limited to bank loans. It also can invest in inflation-indexed securities, as well as mortgage- and asset-backed securities, according to the preliminary prospectus filed with the Securities and Exchange Commission.

Investors have begun clamoring for exposure to bank loans, for a couple of reasons.

INCOME-CRAZED

For one, the loans are rated below investment-grade. Thus they offer income-crazed investors a 4% to 5% yield to compensate for the default risk. The yield is also tied to a benchmark, typically the London Interbank Offered Rate, so the yield on the notes will rise if interest rates do.

In addition, bank loans have received less attention this year than other high-yielding fixed-income investments such as junk bonds and emerging- markets debt. Some†fund managers find them relatively undervalued.

Bank loan funds have performed reasonably well. The Morningstar category showed a return of over 9% year-to-date through Dec. 4. That's less than emerging-markets debt's return of 16% and high-yield bonds' 13%, but higher than the 7% of intermediate-term-bond funds.

The DoubleLine Floating Rate Fund will be the sixth DoubleLine mutual fund.

jkephart@investmentnews.com Twitter: @jasonkephart

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