March 9, 2018

Loan Participation Funds Continue to Attract New Money From Investors

by Patrick Keon

Funds (including both mutual funds and ETFs) in Thomson Reuters Lipper’s Loan Participation Funds peer group took in net new money for the sixth week in seven for the fund-flows week ended Wednesday, March 7. The week’s net inflows of $587 million were the largest among the taxable bond fund asset groups and brought total net inflows for the peer group to $1.8 billion over the last seven weeks. This run of good fortune directly followed a downturn for bank loan funds in which they suffered 14 consecutive weeks of net outflows that saw $4.4 billion leave their coffers.

A stronger-than-anticipated January jobs report and a more hawkish tone from the Federal Reserve on interest rates seem to have contributed significantly to the turnaround for the loan participation group. The jobs report showed the economy had added 200,000 jobs for January, but more importantly the report indicated wage growth was finally heating up. Average hourly wages grew 0.3% for January, driving the year-over-year increase to 2.9%, a level not reached in more than eight years. The increase in wages gave credence to the opinion that the Federal Reserve might react aggressively with interest rate hikes to combat it. This opinion was confirmed with the release of the FOMC minutes in which the Fed indicated it views the economy as stronger than it was at year-end and that interest rate hikes would be needed in 2018. The Fed’s raising interest rates makes bank loan funds more attractive, since the interest rates for bank loans are floating rates. Therefore, when the Fed raises interest rates it causes the yield on bank loan funds to go up as well.

The largest loan participation fund net inflows for this past fund-flows week belong to Lord Abbett Floating Rate Fund (+$124 million), Oppenheimer Senior Floating Rate Fund (+$71 million), and American Beacon Sound Point Floating Rate Inc. (+$67 million). For the year to date the largest positive net flows are attributable to T. Rowe Price Floating Rate Fund (+$331 million), Fidelity Advisor Floating Rate High Income Fund (+$291 million), and Eaton Vance Floating-Rate Advantage Fund (+$267 million).

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