Virtus Voices: Observations on the Loan Market Featuring Frank Ossino
Senior Managing Director and Senior Portfolio Manager
Newfleet Asset Management, LLC
Newfleet Asset Management’s Frank Ossino provides perspective on why the bank loan market should be viewed as an income asset class, not solely as an interest rate hedging tool.
It appears that retail investors (rightly or wrongly) have over time conditioned themselves to manage loan exposure relative to their interest rate view rather than incorporating other major protections – seniority and security – especially at a time of increasing credit or late-cycle scrutiny. Over time, and in the aggregate, the major differentiators of the loan market have produced attractive risk-adjusted returns relative to other income alternatives Despite the current interest rate environment, it is Newfleet’s view that loans should continue to be a part of a fixed income allocation as investors search for yield in a thoughtful and prudent manner.
To learn more about how loans are more than an interest rate hedge, watch now:
IMPORTANT RISK CONSIDERATIONS: Credit & Interest: Debt securities are subject to various risks, the most prominent of which are credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt securities may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities. Bank Loans: Loans may be unsecured or not fully collateralized, may be subject to restrictions on resale and/or trade infrequently on the secondary market. Loans can carry significant credit and call risk, can be difficult to value and have longer settlement times than other investments, which can make loans relatively illiquid at times. High Yield-High Risk Fixed Income Securities: There is a greater level of credit risk and price volatility involved with high yield securities than investment grade securities. Leverage: When a fund leverages its portfolio, the value of its shares may be more volatile and all other risks may be compounded. Liquidity: Certain securities may be difficult to sell at a time and price beneficial to the fund.
Bloomberg Barclays U.S. Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting.
The BofA Merrill Lynch 10+ Year U.S. Treasury Index is a subset of the BofA Merrill Lynch U.S. Treasury Index, including all securities with a remaining term to final maturity greater than or equal to 10 years.
The ICE BofAML U.S. High Yield Index tracks the performance of U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating. Original issue zero coupon bonds, 144a securities, both with and without registration rights, and pay-in-kind securities, including toggle notes, qualify for inclusion. Eurodollar bonds, taxable and tax-exempt U.S. municipal, warrant-bearing, DRD-eligible and defaulted securities are excluded from the Index.
The S&P/LSTA Leveraged Loan Index is a daily total return index that uses LSTA/ LPC Mark-to-Market Pricing to calculate market value change. On a real-time basis, the index tracks the current outstanding balance and spread over LIBOR for fully funded term loans. The facilities included in the Index represent a broad cross section of leveraged loans syndicated in the United States, including dollar-denominated loans to overseas issuers.
The S&P 500® Index is a free-float market-capitalization weighted index of 500 of the largest U.S. companies. The index is calculated on a total return basis with dividends reinvested.
Collateralized loan obligation (CLO) is a security consisting of a pool of loans organized by maturity and risk.
Return per Unit of Risk is the annualized return divided by the standard deviation.
Standard Deviation measures variability of returns around the average return for an investment portfolio. Higher standard deviation suggests greater risk.
Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures.
This commentary is the opinion of Newfleet Asset Management. Newfleet provides this communication as a matter of general information. Portfolio managers at Newfleet make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.