6 funds that seem to be making money play for another year


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New York Stock Exchange traders.

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Could the 2021 winners repeat in 2022? Maybe not as big, but the case of a handful of last year’s winners may be even stronger now.

Almost exactly 12 months ago, this column discussed the top earning pick in 2021 of DoubleLine founder Jeffrey Gundlach. These were variable rate bank loans, which would benefit from the accelerating economic recovery and would be insulated from the effects of rising long-term interest rates and the resulting decline in bond prices. .

In addition, we have suggested that closed-end funds that invest in these loans are the best vehicle for profiting from this sector of the credit markets. The leverage effect made it possible to boost the distribution yields of CEFs, but with relatively limited risk. Their cost of borrowing and the return on their variable rate assets should go hand in hand if interest rates rise.

At the same time, the large double-digit discounts that CEFs were trading at at the time were an added attraction. If these discounts were reduced to an increase in the fund’s share price, it would boost their total returns.

That’s what happened. The eight CEFs of loans listed here a year ago posted total returns ranging from 16.96% to 28.39% in 2021, with an average total return of 21.97%, according to

The morning star

The data.

This compares to a total return of 28.75% over this period of

SPDR S&P 500 Exchange Traded Fund

(ticker: SPY) and less 1.77% of the

IShares Core US Aggregate Bond ETF

(AGG), which track the respective benchmarks of equities and fixed income securities.

On the contrary, the case for variable rate bank loans is even stronger than a year ago. The Federal Reserve’s latest summary of economic projections released at last month’s policy meeting predicts three 25 basis point increases in the range of federal funds target rates by year-end, from 0 -0.25% current. According to the CME FedWatch site, the federal funds futures market has put on a little better than a fourth evenly 25 basis point odds by December from Monday; one basis point is equal to 1/100 of a percentage point.

The Fed’s rate hikes would translate into higher rates on the liabilities and assets of loan CEFs, leaving them relatively unscathed. Meanwhile, as the young 2022 already demonstrated, the Fed’s rate hike expectations were enough to sway stocks and bonds.

For this year’s list, we looked for CEFs that have at least 80% of their assets in floating rate loans and continue to trade at a discount to NAV. This latter quality is much rarer than a year ago after investors understood the attributes of this asset class and raised their prices. We also looked for loan CEFs that at least maintained their payments and preferably increased them.

Fund / Ticker Yield Delivery 12-Mo. Price return 12-Mo. Return on net asset value
Invesco Senior Loan Trust / WR 5.78% -6.03% 17.48% 10.31%
BlackRock Floating Rate Inc. Strat. / ENG 5.94 -3.02 17.46 5.75
Nuveen senior loan / NSL 6.85 -2.93 21.42 10.01
Nuveen Floating Rate Inc. Oppty. / JRO 6.76 -1.35 23.77 10.02
Floating rate Nuveen Inc. / JFR 6.74 -1.15 24.07 9.99
Apollo Principal Floating Rate / AFT 6.21 -0.60 20.70 7.09

Data as of January 7

Sources: CEFconnect.com; fund websites; The morning star

If you are unable to view the table, please click here.

As it turns out, five of the six loan CEFs have been making repeat appearances since last year. As their past 12-month returns show, their stock price returns have far exceeded their net asset value returns, based on how much their haircuts have narrowed.

This year, investors’ expectations should be more modest. These funds are not without risk. They invest in loans from leveraged borrowers, similar to junk bond issuers, although the loans take priority over bonds in the capital structure of companies. And in 2020, loan CEFs were dragged down in the tsunami that swept across all parts of the capital markets.

With these caveats, lending CEFs should fare better than bonds in a rising rate environment. And their returns of around 6% and above would roughly equate to the return projected by many equity strategists for 2022. And as the first week of the year showed, rate expectations injected heightened volatility. in the stock and bond markets.

Write to Randall W. Forsyth at [email protected]


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