Chart of the Week: Benefits of Bank Loans in a Portfolio

Despite almost $36 billion exiting the loan market and negative net fund flows for the past 11 months, Lord Abbett believes that bank loans still have features that make them attractive within a portfolio. In their recent article, they state the benefits of having floating-rate bank loan exposure in a portfolio extend beyond favorable performance in a rising interest rate environment. As illustrated in the chart above, when bank loans are incorporated with a core strategy, the resulting blend provides higher income than the typical core strategy with lower duration.

This blend can also offer effective means of portfolio diversification. Over the past 5 years, leveraged loans (represented in this chart by the Credit Suisse Leveraged Loan Index) had a standard deviation or 3.28% while high quality bonds (represented by the Barclays US Aggregate Index) had a 2.80%. When the two are combined, the risk level shoots down to 2.02%, while the return stays favorable.

Source: Barclays and Credit Suisse. Bank loans represented by the Credit Suisse Leveraged Loan Index (“Leveraged Loans” or “Credit Suisse”); traditional core bonds represented by the Barclays Aggregate U.S. Bond Index (“Barclays Aggregate” or “Barclays Agg”). The blended portfolio represents a 50-50 combination of the Credit Suisse and Barclays Aggregate indexes.
Past performance is no guarantee of future results. Due to market volatility, the asset classes depicted in this chart may not perform in a similar manner in the future. For illustrative purposes only and does not represent any specific Lord Abbett mutual fund or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses and expenses, and are not available for direct investment.
Floating-rate loans are lower-rated, higher-yielding instruments, which are subject to increased risk of default and can potentially result in loss of principal. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan’s value. No investing strategy can overcome all market volatility or guarantee future results.