Lipper Loan Participation Funds (LP) set a new weekly intake record over the past Lipper fund-flows week. The classification pulled in an astounding $2.3 billion this last week which blew away the previous record of $1.9 billion back in August 2013. Two of the top four largest weekly inflows have occurred over the last two fund-flows weeks. What has driven such demand?
The Lipper Loan Participation Funds classification consists 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 below investment grade-rated and are secured by the underlying company’s assets. These funds are often referred to as “leverage loan”, “bank loan”, or “floating rate” funds, and are typically attractive during periods of rising rates given that the funds’ interest payments fluctuate based on the level of an underlying rate.
Lipper Loan Participation Funds have performed extremely well compared to other taxable fixed income classifications. Of the 31 taxable Lipper fixed income classifications, only two have realized positive returns over the past week and since the start of the year—Loan Participation Funds have logged a weekly return of positive 0.09% and a year-to-date return of positive 0.45%. The only other classification in the black for both periods was Emerging Markets Local Currency Debt Funds with a positive 0.06% and positive 0.31%, respectively. Lipper Loan Participation Funds also posted the largest trailing one-year return (+3.62%) of the taxable fixed income classifications.
As we enter a rising rates environment, this classification is poised to continue observing strong positive inflows. Much like 2013, inflows into floating-rate funds started well before the Federal Reserve actually made tapering announcements. The year 2013 kicked off with three quarters of inflows greater than $15 billion—Q3 2013 registered a record $21.4 billion.
With the Fed’s current tone continuing to remain hawkish and inflation appearing to be more persistent than expected, many investors are anticipating multiple rate hikes coming this year, with the first possibly being in March. To brace for the increasing rates, Loan Participation Funds are looking like a safe haven. Now with back-to-back weeks of significant inflows, Loan Participation Funds are on pace to post their largest single monthly intake since December of 2016.
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