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Home>Research & Insights>Fund Times>A Measured Approach to Bank Loans and High Yield

A Measured Approach to Bank Loans and High Yield

Bronze-rated Eaton Vance Floating-Rate and High Income has an impressive management team and long-term record, but high fees temper our enthusiasm.

Morningstar, 06/27/2017

The following is our latest Fund Analyst Report for Eaton Vance Floating-Rate & High Income Fund EIFHX

Although its fees are meaningfully higher than similar peers', the fund’s strong management, consistent and effective process, and strong long-term performance versus peers lead to Eaton Vance Floating-Rate and High Income's Morningstar Analyst Rating of Bronze.

This fund’s team features some of the most tenured and respected managers in the bank-loan and high-yield Morningstar Categories, and it has provided this fund with continuity of personnel and approach. Longtime managers Scott Page and Craig Russ run the  Eaton Vance Floating Rate EVBLX sleeve of this fund and serve as co-heads of Eaton Vance's broad bank-loan team. Page has been with the firm since 1990, and Russ joined in 1997. Michael Weilheimer is a comanager and runs the fund’s up to 20% allocation to Eaton Vance High Income Opportunities I EIHIX. He joined Eaton Vance in 1990 and serves as the firm’s director of high-yield investments. Page and Weilheimer have managed this portfolio since its September 2000 inception.

Each team takes a measured approach to its specific market. And while the bank-loan team typically avoids holding many CCC rated loans because of concerns over their higher default rates, the high-yield team is willing to hold an allocation that is closer to market weight. This leads to a combined portfolio with a CCC weighting close to that of its S&P/LSTA Leveraged Loan Index benchmark. This weighting, along with strong credit selection from both teams, have helped the fund outperform its bank-loan peers over the long term. The fund has also managed to avoid abnormal volatility despite a roughly 20% exposure to more-volatile high-yield bonds. For example, the fund didn’t fall too far behind its typical bank-loan peer during recent credit downturns like the third quarter of 2011 and the mid-2015 through early 2016 high-yield sell-off. Over time, the team's focus on fundamentals has paid off. During the 10-year period ended May 31, 2017, the fund ranked in the best quintile of the category, returning an annualized 4.2%.

While this fund is a strong in several respects, its price tag is a noteworthy detractor.

Process Pillar: Positive | Kenneth Oshodi 06/22/2017
A careful approach to credit selection, close attention to liquidity management, and a continued focus on understanding the various levers of risk in the portfolio all support this fund’s Positive Process rating.

This fund combines Bronze-rated Eaton Vance Floating-Rate and Silver-rated Eaton Vance High Income Opportunities into a portfolio of bank loans and high-yield bonds. The two teams work together to assess relative value between the asset classes when setting the portfolio allocation, but the fund’s total allocation to high-yield bonds is limited to a maximum of 20%. Each team follows a measured approach to their respective markets that starts with an assessment of macroeconomic trends, spread and yield levels, and market liquidity before fundamental analysis is applied to individual security selection. The floating-rate team typically avoids CCC rated loans, arguing that over time, they haven’t paid enough to offset their higher default rates. However, the high-yield team is more willing to allocate to these lower-rated credits as valuations create attractive opportunities. There’s no leverage used in either portfolio.

Because of the nature of the bank-loan market, the floating-rate team pays close attention to liquidity management by modeling worst-case outflow scenarios. At times, they have had to tap a line of credit to meet daily liquidity obligations for their open-end funds.

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