Bank-Loan Funds Are in a Sweet Spot
They do well when rates are rising and the economy is strong.
![man holding tree growing out of coins](https://cdn.mos.cms.futurecdn.net/pbyxiJmKBkjLYf2FK6tp5f-415-80.jpg)
As interest rates fell in 2019 and 2020, investors paid bank loans little attention. But an economic recovery and the likelihood of rising short-term interest rates are prime conditions for these loans, which pay an interest rate that adjusts every few months in step with a short-term bond benchmark. When yields rise, most bond prices fall. But bank loans, often called floating-rate loans, retain their value.
The managers at Fidelity Floating Rate High Income (FFRHX), Eric Mollenhauer and Kevin Nielsen, perform detailed analysis on each company before they add a bank loan to the fund.
Bank loans are typically issued to firms that have junk credit ratings (double-B to triple-C). That means they have a higher risk of default, so Mollenhauer and Nielsen are right to be choosy. Along with 20 analysts, each an industry specialist, the managers build a diversified portfolio one loan at a time based on a company's prospects over the next two to three years.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Floating Rate High Income has a reputation for being more conservative than its peers, tilting toward firms rated double-B, the highest-quality end of high-yield credit ratings. That's still true, but lately the fund holds more of its assets than usual in loans rated single-B.
These days, it's a risk worth taking.
"With an accommodative Federal Reserve, pent-up demand and the potential for a big infrastructure package, our companies are set up well," says Nielsen. The fund currently has decent exposure to hotels and leisure companies. Outdoor gear retailer Bass Pro Shops is the top holding.
Regional firms once dominated the bank-loan market, but since 2008 it has more than doubled in size, to $1.2 trillion – as big as the high-yield bond market, says Mollenhauer. Companies search for such financing because the loans offer flexibility. They are short-term, with an average maturity of less than five years, and the loans can be paid off at the borrower's discretion. Now, many household names fill the market, including Caesars Resorts and Charter Communications (CHTR).
Since Mollenhauer took over in 2013 (Nielsen joined in 2018), the fund's 3.5% annualized return has beaten the typical bank-loan-fund but trailed the benchmark, the S&P/LSTA Leveraged Loan index. The fund yields 3.03%.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
June CPI Report Comes in Soft: What the Experts Are Saying About Inflation
CPI Odds rise for a September rate cut after prices fall on a monthly basis for the first time in almost two years.
By Dan Burrows Published
-
Best Closed-End Funds (CEFs) to Buy Now
The best closed-end funds will significantly boost your portfolio income and allow you to buy their underlying stocks and bonds at a discount.
By Charles Lewis Sizemore, CFA Published
-
Softer June Jobs Report Raises Rate-Cut Bets
Jobs Report Slower hiring and a rise in the unemployment rate up the odds of the Fed easing more than once before year-end, experts say.
By Dan Burrows Published
-
Fed Holds Rates Steady, Sees Just One Cut This Year: What the Experts Are Saying
Federal Reserve The Federal Reserve kept interest rates unchanged and penciled in one quarter-point cut in 2024.
By Dan Burrows Published
-
May CPI Report Comes in Soft: What the Experts Are Saying About Inflation
CPI A slowdown in inflation keeps the Fed on track for rate cuts later this year.
By Dan Burrows Published
-
When Will the Fed Cut Rates? The Experts Weigh In
Federal Reserve The timing of the first quarter-point cut to the federal funds rate remains as opaque as ever.
By Dan Burrows Published
-
May's Jobs Growth Blows Past Forecasts: What the Experts Are Saying
Jobs Report A blowout jobs report and a bit of wage inflation means a Fed pivot towards easing will have to wait.
By Dan Burrows Published
-
April CPI Report Offers Some Relief: What the Experts Are Saying About Inflation
CPI CPI moderated last month, boosting hopes for interest rate cuts coming sooner rather than later.
By Dan Burrows Published