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Fund Spy

Where Do Bank-Loan Funds Go From Here?

The bank-loan Morningstar Category has experienced volatile trends in flows over the past few years.

A version of this article was published in the August 2016 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.

These are interesting times for bank-loan portfolio managers. Bank-loan funds have proved to be especially prone to whipsawing views about the path of interest rates. Like high-yield bonds, bank loans, also referred to as floating-rate loans, are usually issued by below-investment-grade companies, so credit risk is still high, and returns typically display a higher correlation to equities than traditionally safe-haven bonds like Treasuries. If the economy is weak or in recession, this asset class may not perform well. For example, the bank-loan Morningstar Category fell 29.8% in 2008 (it also surged by 41.8% in 2009).