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Bank loan funds are in an ideal position

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With interest rates falling in 2019 and 2020, investors have paid little attention to bank loans. But an economic recovery and the likelihood of a rise in short-term interest rates are preferred terms for these loans, which pay an interest rate that adjusts every few months based on a bond benchmark at short term. When yields rise, most bond prices fall. But bank loans, often referred to as variable rate loans, hold their value.

The managers of Fidelity Variable Rate High Income (FFRHX), Eric Mollenhauer and Kevin Nielsen, perform a detailed analysis of each company before adding a bank loan to the fund.

Bank loans are usually given to companies that have undesirable credit scores (double B to triple C). This means they have a higher risk of default, so Mollenhauer and Nielsen are right to be choosy. With 20 analysts, each an industry specialist, managers build a diverse portfolio, one loan at a time, based on a company’s outlook over the next two to three years.

Floating Rate High Income has a reputation for being more conservative than its peers, tilting towards companies rated double B, the more qualitative part of high yield credit ratings. This is still true, but lately the fund is holding more of its assets than usual in single-B rated loans.

These days, that’s a risk worth taking.

“With an accommodating Federal Reserve, pent-up demand and the potential for a big infrastructure package, our businesses are well established,” Nielsen said. The fund currently has decent exposure to hotels and leisure companies. The main holding company is outdoor equipment retailer Bass Pro Shops.

Regional firms once dominated the bank lending market, but since 2008 its size has more than doubled to $ 1.2 trillion, the equivalent of the high yield bond market, according to Mollenhauer. Businesses seek such financing because the loans offer flexibility. They are short-term, with an average maturity of less than five years, and loans can be amortized at the borrower’s discretion. Today, many well-known 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 has been below the benchmark, l ‘S & P / LSTA Leveraged Loan Index. The fund returns 3.03%.

Table of bank credit funds

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