With $2 billion in flows over the past three months, investors have noticed that rates are approaching the level where many bank loan funds will adjust their payments upward.
Brian Moriarty: In August and September, my colleague Sumit Desai spent some time highlighting bank loan funds, and I wanted to follow up on his work. As he noted, bank loans are positioned to benefit from a rising rate environment, but I wanted to spend more time on the unique aspects of this asset class.
The income paid by bank loans is linked to short-term LIBOR rates, usually between 30 and 90 days depending on the loan. When LIBOR moves up and down, the income paid by the loans moves with it. However, over 90% of loans have a LIBOR floor of 1%. The income adjustments won't go into effect until LIBOR breaks through the 1% barrier.
There is also a 60-day reset period, which means that the income adjustments won't go into effect until 60 days after LIBOR breaches 1%. As of Dec. 12, 90-day LIBOR was at 95 basis points, up from 85 basis points in September. Investors have noticed. During the fourth quarter nearly $2 billion has flowed into the bank loan fund category trailing only the intermediate-term bond and foreign large blend categories. The closer LIBOR gets to 1%, the more money is likely to flow into the bank loan category.
