Bank loans outperformed versus most other fixed income investments in a period dominated by concerns about Fed policy and rising interest rates. Strong investor demand as measured by mutual fund inflows and record issuance for leveraged buyouts, collateralized loan obligations, and other acquisition activity, provided a strong technical backdrop for the asset class. A broad consensus emerged that the Fed would begin to taper its asset purchase program in September. However, after the Fed's surprise decision to continue its asset purchase plan at current levels, bank loans and other risk assets rallied. Additionally, sentiment improved with the subsiding threat of U.S. military action in Syria.
The Floating Rate Fund returned 1.05% in the quarter compared with 1.23% for the S&P/LSTA Performing Loan Index. For the 12 months ended September 30, 2013, the fund returned 4.18% versus 5.07% for the S&P/LSTA Performing Loan Index. The fund's 1-year and Since Inception (07/29/2011) average annual total returns were 4.18% and 4.35%, respectively, as of September 30, 2013. The fund's expense ratio was 1.07% as of its fiscal year ended May 31, 2013.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The Floating Rate Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
We made minor industry allocation shifts in the quarter. Services, health care, information technology, and financials remained the portfolio's largest exposures. Our major holdings are in first-lien and senior bank loans. We have a large allocation to loans with Libor floors, which establish a minimum interest rate payable on a floating rate loan, in an effort to maintain high current income and to protect our income stream in today's low-rate environment. Overall, credit selection contributed to relative performance. During the period, fixed rate, high yield bonds, especially in financials that do not issue bank loans, performed well. These bonds enhance the portfolio's liquidity and can augment the current income stream. The largest detractor was our allocation to reserves. Although we try to minimize reserves, we need to keep some cash on hand for liquidity and day-to-day operations.
The outlook for floating rate loans remains solid. Issuers continue to push out near-term maturities and the fundamentals underpinning the asset class are improving, as evidenced in the deleveraging of corporate balance sheets and solid cash flow generation. Therefore, we see little reason for a substantial rise in the overall default rate over the next year. We view floating rate loans as an excellent asset class for diversification and an indirect hedge against inflation in a rising interest rate environment. As always, we are committed to the disciplined investment approach and long-term perspective that have helped us generate attractive risk-adjusted performance.