We have long heard the debate as to whether bank loans should be a tactical or strategic allocation in client portfolios. We think investors should consider the asset class as a strategic allocation for three reasons:
1. Diversification – Correlations with other fixed-income and equity asset classes are low, and in some cases negative
2. Spread is key for income - In low LIBOR environments, income overwhelmingly comes from spread, not LIBOR
3. Power of compounding income – With only two negative return years in its 25-year history, the bank-loan asset class has demonstrated the ability to compound income year-after-year
Past performance is not a guarantee of future results.
Important Risks: Investing involves risk, including the possible loss of principal.● Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. ● Loans can be difficult to value and less liquid than other types of debt instruments; they are also subject to nonpayment, collateral, bankruptcy, default, extension, prepayment and insolvency risks.