Portfolio Manager Perspectives

Jeff Benjamin

Floating-rate funds taking off

Investors piling into bank loan mutual funds; inflation protection the lure

Apr 13, 2011 @ 1:05 pm

By Jeff Benjamin

Goldman Sachs Assets Management LP has become the latest fund manager to jump into the increasingly popular bank loan mutual fund space.

The Goldman Sachs High Yield Floating Rate Fund Ticker:(GFRAX), which launched on March 31, represents the 30th fund in the category, according to Morningstar Inc.

“Loan funds are resonating with investors right now because of the attractive current income, and they will do better [than most other fixed-income funds] in a rising rate environment,” said lead portfolio manager Michael Goldstein.

For investors, the appeal of bank loan funds is that the underlying loans are pegged to the London Interbank Offered Rate and adjust on average every 60 days.

That means that as Libor, currently at historic low levels of 30 basis points, adjusts to a stronger economy by rising toward its long-term average of more than 4%, fund investors will enjoy higher total returns.

The corporate loans include premiums of more than four percentage points over Libor, providing current yields in the 5% range.

That kind of yield in the fixed-income space, combined with a 42% average return in 2009 for mutual funds in the category, has sparked a frenzied appetite by investors looking to hedge interest-rate risk.

Even though the category's average return was just 9.4% last year, such funds saw more than $16 billion worth of net inflows. And that run has carried over to nearly $15 billion in net inflows through the first three months of this year.

By comparison, the category had less than $4 billion in net inflows in 2009, and saw net outflows of $8.6 billion in 2008.

The mutual fund market represents a broadening of the bank loan investor base, according to Mr. Goldstein.

“Investors over the past few years have built up fixed-income portfolios where they are pretty interest-rate sensitive,” he said. “Bank loan funds give them an opportunity to inch out on the risk curve away from money market funds, and some of the money is also coming from other bond investments that have appreciated and became a bigger part of the portfolio than was otherwise necessary.”

While this is Goldman's first bank loan mutual fund, the asset management team, which includes co-manager Jean Joseph, is already seasoned in the bank loan market.

Goldman's 40-person global credit team oversees more than $80 billion in of credit assets.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.


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