Fund Spy

Balancing Act: Picking Actively Managed Bank-Loan Funds

Brian Moriarty

In a recent article, my colleague Phillip Yoo highlighted developments and risks in the bank-loan market, including rising leverage ratios, the proliferation of so-called “covenant-light” loans, and the liquidity risk inherent to the asset class. These challenges all have implications for how we evaluate actively managed funds in the bank-loan Morningstar Category.

Credit Research Is Paramount
Bank loans are higher in the capital structure than bonds, so they have a better claim on a company’s assets in the event of a restructuring and have historically featured higher recovery rates than high-yield bonds. As a result, they are often viewed as a more defensive way to access credit risk. That said, most bank loans carry below-investment-grade ratings, and there are plenty of risky loans out there, including those issued by companies that rely only on the bank-loan market for credit.

Brian Moriarty does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.