Taking It to the Bank (Barron's, 7/15)
- In a debt market starved of yield and vulnerable to Fed tapering, all eyes are on Welsh’s Fund
- Welsh shares how he handpicks the loans the Fund invests in
- Senior floating rate loans have historically mitigated the impact of rising long-term interest rates
Joseph Welsh, portfolio manager of Oppenheimer Senior Floating Rate Fund (OOSAX), shared with Barron’s magazine some of the secrets behind his success investing in bank loans. Now that the fixed income market is starved of yield, all eyes are on Welsh’s Fund’s performance.
Senior Floating Rate Fund invests in bank loans of companies whose credit ratings are below investment grade. “Senior” means that holders of these loans enjoy a higher ranking in a company’s credit structure than unsecured bonds and/or equity holders. Floating rate loans reset every 30 to 90 days to the higher of the London InterBank Offered Rate (LIBOR) or a predetermined floor for about 80% of loans outstanding, Consequently, loans are a very short-duration asset class and have exhibited less sensitivity to rising longer term interest rates than most fixedrate bonds.
These investment characteristics make senior floating rate loans an attractive option for investors who seek income while seeking to mitigate the impact of rising rates. Although loans are below investment grade and have credit risk, Welsh and his team carefully research the companies in whose debt they invest. Remember also that “investment grade” is not a guarantee against loss: the value of fixedrate investment -grade bonds can fall significantly when rates rise.
To find out more about Welsh’s investment strategy, access the full Barron’s article.
Senior loans are typically lower-rated and may be illiquid investments (which may not have a ready market). The Fund may invest without limit in lower-rated securities. The Fund may invest a variable amount in debt rated below "B." The Fund may invest 25% or more of its assets in securities issued by companies in the financial services sector which may be susceptible to economic and regulatory events, and increased volatility. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Emerging and developing market investments may be especially volatile. Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and the Fund’s share prices can fall. Derivative instruments whose values depend on the performance of an underlying security, asset, interest rate, index or currency, entail potentially higher volatility and risk of loss compared to traditional stock or bond investments. The Fund may use leverage (borrowing) which involves transaction and interest costs on amounts the Fund borrows, which may reduce performance.
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