The bank loan market posted solid first-quarter returns in the current low-rate environment. The period was characterized by generally encouraging economic data and solid corporate earnings in the U.S., although renewed concerns about the eurozone emerged. With investors' appetite for risk and demand for yield largely intact throughout the period, lower-rated issues outperformed higher-rated credits. Loan new issue activity set record volumes in the first three months of the year; the majority of issuance was refinancing related, although we did see an increase in acquisitions/buyouts. As coupon rates on new loans continue to fall, detailed credit research and a thorough assessment of downside risks become increasingly important.
The Floating Rate Fund returned 1.79% in the quarter compared with 2.19% for the S&P/LSTA Performing Loan Index. For the 12 months ended March 31, 2013, the fund returned 6.23% versus 8.06% for the S&P/LSTA Performing Loan Index. The fund's 1-year and Since Inception (07/29/2011) average annual total returns were 6.23% and 5.15%, respectively, as of March 31, 2013. The fund's expense ratio was 1.48% as of its fiscal year ended May 31, 2012.
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.
Benchmark Definitions
We made only minor industry allocation shifts in the first quarter; health care, services, and financials remained the portfolio's largest exposures. Our biggest positions are in first-lien, senior bank loans, and we favor issues with Libor floors, which establish a minimum interest rate payable on a floating rate loan. We continued to increase our large allocation to loans with Libor floors in an effort to maintain high current income and to protect our income stream in today's low-rate environment. However, as new issuance trends became more aggressive we also increased our exposure to covenant-lite loans to 33% from 27% at the end of December. Evaluating covenants is an essential component of our fundamental research, and we are willing to invest in covenant-lite loans from fundamentally sound credits.
The outlook for the loan market remains solid from an underlying corporate standpoint. Issuers continue to push out near-term maturities and the fundamentals underpinning the asset class are improving, as evidenced by ongoing deleveraging and solid cash flow generation. Therefore, we see little reason for a substantial rise in default rates 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.
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