Individual investors are putting more money into bank-loan funds, taking added risk in a search for higher yields and a hedge against inflation as the Federal Reserve vows to keep interest rates at near-record lows.
U.S. floating-rate funds in April had the biggest inflows in 11 months, according to preliminary data from EPFR Global, a Cambridge, Massachusetts-based research firm. Investors poured $729 million into the funds, the most since $2 billion last May. The funds buy speculative-grade loans, a type of floating-rate debt that ranks senior to bonds and is used to finance buyouts.
Bank-loan mutual funds lost about 30 percent during 2008, compared with about a 26 percent decline for funds that invest in high-yield bonds, according to data from Morningstar Inc., a Chicago-based research firm. This year through May 3 loan funds have gained about 4.8 percent, compared with 6.8 percent returns for high-yield funds. Inflation was about 2.7 percent over the 12 months through March before seasonal adjustment, according to the Bureau of Labor Statistics.
Investors buying bank loans may not realize that the loan prices tend to be correlated with stocks, said Douglas Anderson, a director in Palo Alto, California, with Harris MyCFO LLC, which manages about $20 billion on behalf of families and is a unit of Bank of Montreal.
Buyout firms’ practices of piling debt onto companies they own to extract payouts may reduce the credit worthiness of borrowers.