by Jack Fischer.
The Lipper Loan Participation Funds classification—including both conventional mutual funds and ETFs—has seen a massive influx of flows since the start of the year compared to its historical average. Total estimated net flows for March were $5.8 billion, representing the second largest March inflows to date. Q1 2021 estimated net inflows totaled $14.0 billion, equating to the classification’s third largest start to a calendar year of all time. Over the past two weeks, Lipper Loan Participation Funds have drawn in more than $2 billion alone and have been net positive in weekly flows for 14 straight weeks (check out the latest U.S. Weekly FundFlows Insight Report).
Before we dig deeper, let’s define Lipper Loan Participation Funds (LP). LP falls under our macro-group General Domestic Taxable Fixed Income and consist of funds that invest primarily in participation interests in collateralized senior corporate loans that have floating or variable rates. These senior corporate loans are often for below investment grade-rated companies and are secured by the company’s assets, giving them a slight credit risk advantage over typical high-yield bonds. Often called “bank loan” or “floating rate” funds, the Lipper Loan Participation Funds classification does well on average during periods of rising rates given that the funds’ interest payments fluctuate based on the level of an underlying rate.
Treasury yields have been at historic lows, but what is arguably more important than current yield levels is the trajectory of yield rates. Where does the market believe yields are heading? And how quickly will they get there? For about the last eight months or so, the U.S. has been in a rising rate environment. The expectation is that there will be continued future increases—Standard & Poor’s Leveraged Commentary & Data conducted their Q1 survey of leveraged finance professionals and 43% of respondents indicated they expect the 10-year U.S. Treasury yield will end the year between 1.50% and 1.99% (for reference, we began the year at 0.93%).
Lipper Loan Participation Funds have certainly reaped the rising rates rewards since the start of the year. The year-to-date estimated net flows are $16.1 billion. They have been on the plus side of weekly net flows each week since recording $10 million in outflows in week 1 of 2021.
Another tailwind for Lipper Loan Participation Funds weekly inflows has been their recent relative outperformance over other fixed income classifications. In Q1, the Lipper Loan Participation Funds classification finished second in total return under the entire Taxable Fixed Income universe and was only one of 10 to finish in the green (see full performance breakdown in Q1 2021 Fixed Income FundMarket Insight Report).
Federal Reserve Chair Jerome Powell has indicated time and time again that the Fed will maintain its current accommodative policy in order to support the Fed’s dual mandate of price stability and maximum employment. The market has also been constantly reminded that the Fed will not balk at any temporary signs of inflation or minor weekly improvements in the job figures. What does this mean for the Lipper Loan Participation Funds classification? Well, even though the Fed might not raise rates this year, a plurality of leverage financial professionals believe there is still room for Treasury yields to increase, most likely leading to continued net inflows into Loan Participation Funds.
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