(April 15, 2014) — Senior bank loan strategies are on the increase among institutional investors, as they seek diversification in their fixed income portfolios.
Data from ING Investment Management showed that 42% of the 84 pension funds quizzed believe they and their peers have increased exposure to senior bank loans over the past six months.
In addition, just 8% believe demand for senior bank loans will fall in the next 12 months, compared to the 40% who expect pension funds to increase their exposure further.
Dan Norman, group head of ING IM’s senior bank loan’s team, said investors were keen on the asset because they were struggling to find attractive sources of yield in fixed income.
“Senior bank loans offer an excellent balance of income and security, and these characteristics have fuelled strong demand for this asset class over the last couple of years. We believe that this will continue,” he said.
“The potential for the fund management industry here is strong because there are still institutional investors who want and need a better understanding of the benefits of senior loans and what they offer to a diversified fixed income portfolio.”
ING Investment Management itself revealed assets under management in its senior bank loan strategies increase by 46% over the past 12 months, from $13 billion to $19 billion.
Senior bank loans are extensions of credit made to non-investment grade corporations, issued privately and traded directly among banks and institutional investors in a secondary market.
They are also commonly referred to as floating rate loans because the interest paid changes with market interest rates. The interest rate reset period varies from loan to loan, but a large, diversified portfolio of senior loans can be expected to have a weighted average interest rate reset period of 60 days or less. As a result, the income earned from a senior loan portfolio is generally very responsive to changes in short-term interest rates.
The asset class saw huge inflows in 2013 because of its strong performance—they currently provide yields of up to 5% according to ING Investment Management—in a difficult market.
When asked what the main benefit of investing in senior bank loans is, 29% of pension funds said diversification of a fixed income portfolio, followed by 19% who said attractive risk adjusted returns. One in seven said it was because the default risk is low.
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