Might senior loans play a role in a multi-asset portfolio?
They can with specific objectives and the right multi-asset expert.
One key potential benefit of multi-asset investing is the often closely managed exposure to specific factors. And one factor we believe in is senior loans, also known as bank loans or leveraged loans. If the right asset management skills are in place, we believe bank loan exposure can help to deliver desired investment outcomes.
How are bank loans different?
Let’s start with the asset class. Bank loans are corporate debts that are issued by below-investment-grade companies. Bank loans typically have a high correlation to high-yield bonds, which are also issued by companies with below-investment-grade credit ratings, such as BB- or B-rated issuers.1
How might bank loan exposure benefit a portfolio?
- They may often offer relatively high income, when compared to other, more typical fixed income exposures, like the current yield of 5.0% for Credit Suisse Leveraged Loan Index, compared to 2.6% yield to maturity for Bloomberg Barclays U.S. Aggregate Index as of March 31, 2017.
- Bank loans may have minimal interest rate risk associated with them because their coupons are tied to LIBOR (London Interbank Offered Rate), a benchmark rate that some of the world’s leading banks charge each other for short-term loans. So, the interest income associated with bank loans float as interest rates rise, meaning higher interest rates can result in higher interest income for bank loan investors.
- They sit in a senior position to the capital structure of a company, meaning they have the first claim to the company’s assets if the company goes to default, so they get more recovery. In other words, bank loans might help to provide better downside protection from credit risk than high-yield bonds, all else being equal.
- Bank loans can help to offer diversification benefits because they often don’t have as much interest rate risk as other fixed income instruments, and less volatility than high-yield bonds. For instance, bank loans had -0.0 correlation to the Barclay’s U.S. Aggregate Index and 0.59 correlation to the S&P 500® Index for the last 10 years as of March 31, 2017. High-yield bonds had 0.74 correlation to the S&P 500 Index for the same period.
Skills that may be needed to help bank loans work in a multi-asset portfolio
Our investment strategists believe bank loans can help to provide high value in a diversified multi-asset portfolio, but also require skilled managers to deliver on the potential benefits stated above. Finding managers with such skills can be a daunting task for many kinds of investors. We believe that an investment expert for this kind of task, demands a commitment to deep active manager research. We also believe exposure to senior loans requires thoughtful asset allocation and is likely to work best when an asset manager can dynamically manage portfolio allocations and adjust as needed to meet an investors’ desired outcomes.
Could bank loans be part of a multi-asset portfolio? We believe the answer can be yes, with one big caveat: it is important to ensure that any asset manager‑–or professional investment advisor‑–an investor chooses to work with be an expert who has the required skills to provide such market factor choices within a multi-asset portfolio, remembering that all investments have risk.
Disclosures:
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Investing involves risk and principal loss is possible.
Past performance does not guarantee future performance.
This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Bond investors should carefully consider risks such as interest rate, credit, default and duration risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high-yield ("junk") bonds or mortgage-backed securities, especially mortgage-backed securities with exposure to sub-prime mortgages. Generally, when interest rates rise, prices of fixed income securities fall. Interest rates in the United States are at, or near, historic lows, which may increase a Fund's exposure to risks associated with rising rates. Investment in non-U.S. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries.
Diversification does not assure a profit and does not protect against loss in declining markets.
Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.
Credit Suisse (“CS”) Leveraged Loan (“LL”) is an index designed to mirror the investable universe of the $US-denominated leveraged loan market. The index inception is January 1992. The index frequency is monthly. Total return of the index is the sum of three components: principal, interest, and reinvestment return. The cumulative return assumes that coupon payments are reinvested into the index at the beginning of each period.
Barclays U.S. Aggregate Bond Index is an index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities.
The S&P 500®, or the Standard & Poor’s 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
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1 Credit ratings provide a useful measure for comparing fixed-income securities, such as bonds, bills and notes.Investment grade refers to the quality of a company's credit. In order to be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's. Anything below this 'BBB' rating is considered non-investment grade. If the company or debt is rated 'BB' or lower it is known as junk grade, in which case the probability that the company will repay its issued debt is deemed to be speculative.
