Floating rate loans posted solid first-quarter gains, extending their multiyear string of strong performance. The market benefited from strong fundamental underpinnings, including limited defaults, healthy earnings and free cash flow generation, and low financing costs. Mixed U.S. economic data, uncertainty about the timing of Federal Reserve rate hikes, and geopolitical concerns weighed on sentiment at times, but demand for new loan issuance remained strong. At the end of April, one of the market's largest issuers, a Texas-based utility, filed for bankruptcy. Although the filing caused a spike in the loan market's default rate, the event was expected and the market's reaction was muted.
The Floating Rate Fund returned 1.05% in the quarter compared with 1.25% for the S&P/LSTA Performing Loan Index. For the 12 months ended June 30, 2014, the fund returned 4.58% versus 5.43% for the S&P/LSTA Performing Loan Index. The fund's 1-year and Since Inception (07/29/2011) average annual total returns were 4.58% and 4.44%, respectively, as of June 30, 2014. 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.
Services, health care, information technology, and financials remain large industry exposures. Credit selection, especially in energy, services, and cable operators, generated a strong contribution to performance versus the benchmark. However, credit selection in utilities and our cash reserves allocation detracted from relative returns. We remain extremely selective regarding the recent new issuance, so we participated in less than one-third of the recent offerings. The portfolio is primarily invested in high-quality, traditional loan structures, those with solid covenants and first priority on assets.
The outlook for floating rate loans, in our view, remains solid. Issuers have repaired their balance sheets, extended maturity dates, and reduced capital costs through refinancing activity. The combination of above-average yield, short duration (interest rate sensitivity) characteristics, and the floating rate coupon feature of bank loans should continue to generate strong investor demand. Following a surge in refinancing activity over the past several years, many issuers have pushed out their near-term maturities, and the limited amount of bank loans that are set to mature in the next two years is highly supportive of the low default environment. Our team maintains a commitment to credit research and risk-conscious investing that has led to favorable returns for our shareholders over various market cycles. As always, our goal is to deliver high current income while seeking to contain the volatility inherent in this market, and we view floating rate loans as an excellent asset class for diversification. (Diversification cannot assure a profit or protect against loss in a declining market.)