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Near-Term Hurdles for Bank-Loan Funds

They still have a place in portfolios, but investors need to be aware of some technical factors.

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Sumit Desai: The bank-loan category grew significantly over the past few years, peaking at almost $147 billion in net assets in March 2014. However, sentiment toward bank loans has changed since then, and the category has lost almost $26 billion via outflows in the last 12 months. It should be noted, however, that the majority of outflows were concentrated, as more than half of the redemptions came from five funds out of 55 total.

Despite these outflows, though, the overall bank-loan category has performed relatively well in the past year. While not a perfect comparison, we view bank loans as similar to high-yield bonds in that they're both generally issued by highly leveraged companies. During the past twelve months ended Sept. 30, 2015, the bank-loan Morningstar Category squeaked out a positive 0.2% return, while the high-yield bond category has actually declined 3.6%. Credit markets sold off significantly during the past year, due mainly to the energy and commodities sectors. However, these hard-hit sectors represent only 6% of the bank-loan market versus almost 20% for high-yield bonds.

Sumit Desai, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.