The hunt for a less volatile class of investments with attractive yields is ongoing for investors. While some focus on spinning the ups and downs of the market into gold, others intent on preserving portfolio value would rather a less volatile ride. These are the investors now eyeing secured bank loans as investments. But why exactly are they doing so?
"A lot of investors simply can't sustain the level of volatility in their portfolios that they have seen in the past," says Curtis Arledge, CEO of Investment Management at BNY Mellon. Faced with the prospect of rising interest rates, those looking to preserve the value of their investments see added advantage in the floating rate aspect of loans.
Managing the Risk
Heightened interest in loans resulted in increased flows to the market in 2013, according to BNY Mellon's Eric Kamback, the CEO of Corporate Trust. But what should those concerned with rising rates, managing risk and securing reliable income streams consider before committing funds to the loan market?
For one, they should know that loans offer even more attractions — besides floating rate interest — such as senior secured positions in a company's capital structure and quarterly principal payments. But as with all investments, there is risk that must be managed. "You need to work with someone who can do the credit analysis," Curtis says. "Someone who understands the marketplace."
Managing the risk also means paying close attention to "the underlying structure of the processing and servicing of the loan," says Eric. He believes the key providers need to "remain focused on standardization and automation efforts and making the market more transparent."
What else should investors think about before allocating to loans? Curtis and Eric offer the following thoughts:
- Invest with a firm that has a full view of the credit landscape. You will need a guide who understands the relative value of the opportunities across regions. "It's very important to understand where the value in the marketplace is," says Curtis Arledge, "for value will change from time to time."
- The regulatory environment will continue to present a challenge. However, Eric Kamback believes "there's a lot that can be done to advance standardization of the loan market and meet the regulatory requirements." He sees specialized loan servicing playing a critical role in the market's success. He also sees an industry continuing to transform itself.
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