August 2, 2019

Loan Participation Funds Continue to See Money Leave

by Pat Keon, CFA.

Loan participation funds (including both mutual funds and exchange-traded funds) suffered through their thirty-seventh consecutive weekly net outflow as more than $632 million left their coffers during the fund-flows trading week ended Wednesday, July 31. This is the loan participation group’s longest losing streak on record (Lipper began tracking this data in 2003), during which time they’ve had total net negative flows of $33.6 billion. Not only is this the longest net outflow streak ever for the group, it is also the most intense. The second longest streak for this peer group was 32 weeks (during Q3 2015 through Q1 2016), but total net outflows during that downturn was only about half (-$17.6 billion) of what the group has currently experienced. The loan participation (or bank loan) funds peer group has experienced net negative flows of $22.6 billion for the year to date and is on pace to shatter its previous worst annual net outflow of $23.9 billion for 2014.

Bank loan funds, as they have floating rates, are significantly impacted by the direction of interest rates. The Federal Reserve’s stance on rates for most of this year has been that it will need to see proof (an increase in inflation, for example) before raising rates again, which has driven investors away from the loan participation peer group. The Fed took it a step further at its meeting this week by cutting interest rates (25 basis points) for the first time since 2008. While the Fed did not commit to additional rate decreases, it did seem like interest rates would remain static at best for the foreseeable future, which would be a negative for loan participation funds.

For the year to date, the overwhelming majority of net outflows for the peer group has come from mutual funds (-$21.1 billion), while ETFs have seen $1.5 billion leave. On the mutual fund side of the ledger, the largest net outflows belong to the Invesco Oppenheimer Senior Floating Rate Fund (-$2.2 billion), Lord Abbett Floating Rate Fund (-$2.0 billion), and Virtus Seix Floating Rate High Income Fund (-$1.3 billion). For ETFs, the most significant net negative flow is attributable to the Invesco Senior Loan ETF (BKLN) at -$1.4 billion.

 

 

 

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