Bank-Loan Funds: A Risky Reach for Yield

With interest rates so low, individual investors have been piling into bank-loan funds, taking on more risk as they seek higher yields and a hedge against inflation. In April $729 million flowed into U.S. mutual funds that invest in the corporate debt, also known as floating-rate loans, according to preliminary data from EPFR Global, a research firm. This year investors added a net $1 billion to the funds through May 2, after pouring in $6.4 billion last year.

The funds buy speculative-grade loans used to finance buyouts. Because their rates are variable, the loans are less vulnerable than fixed-rate investments to increases in interest rates. And they usually offer better yields than high-quality bonds. “Where else can you get 4 percent to 5 percent with zero duration?” says Christopher Remington, institutional portfolio manager for Eaton Vance, which oversees about $24.7 billion in floating-rate loans for individual and institutional investors. Duration is a measure of interest-rate sensitivity.