The bank loan market posted a solid second-quarter gain. Energy, metals and mining, and lower-quality issuance outperformed, although they represent smaller portions of the loan market. Supply and demand dynamics were supportive of the market, including an increase in new issue volume. While the default rate did increase over the quarter, the level remains below its long-term average, and the majority of the default activity has been in commodity-related issuers.
The Floating Rate Fund returned 1.74% in the quarter compared with 2.84% for the S&P/LSTA Performing Loan Index. For the 12 months ended June 30, 2016, the fund returned 1.63% versus 1.46% for the S&P/LSTA Performing Loan Index. The fund's 1-year and Since Inception (07/29/2011) average annual total returns were 1.63% and 3.45%, respectively, as of June 30, 2016. The fund's expense ratio was 0.81% as of its fiscal year ended May 31, 2015.
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.
The bulk of the fund's holdings are in bank loans and corporate bonds in the higher-quality tiers of the below investment-grade universe. We invest primarily in BB and B rated loans, which have historically outperformed CCC rated loans with less volatility. After a multiyear run as the portfolio's top contributor, the energy sector, which generated a strong absolute performance contribution, was the largest relative performance detractor. Credit selection and, to a lesser extent, an underweight allocation to the energy and metals and mining sectors hurt our relative results. The portfolio maintained its large allocation to traditional loan structures-those with solid covenants (a legal provision requiring the borrower to fulfill certain conditions) and LIBOR floors, which provide additional income for bank debt.
The majority of companies in the asset class appear to be in good financial shape, and we believe that the U.S. economy will continue to generate stable, albeit modest, growth in 2016. However, we expect that defaults will continue to rise in commodity-related sectors this year but turn lower in 2017. Income demand is highly supportive for our asset class. As always, our focus in managing the fund is on delivering high current income while seeking to contain the volatility inherent in this market. Our team maintains a commitment to thorough credit research and risk-conscious investing, which has led to favorable longer-term returns for our shareholders over various market cycles. Bank debt has become an increasingly attractive option for investors looking for above-average yield and below-average interest rate sensitivity compared with most fixed income sectors