Stein Roe floats bank loan fund
December 14, 1998
Stein Roe & Farnham expects to be the first to offer a floating-rate bank loan fund in the no-load channel. The Stein Roe Floating Rate Income Fund is currently in a pre-subscription period which ends December 18. It will be offered to the general public soon after that.
The fund invests in the relatively new bank loan asset class which, in the last 10 years, has commanded increased attention from fund sponsors, financial intermediaries and investors. This past June, Van Kampen brought in $1.8 billion when the Van Kampen Senior Income Trust was introduced.
A handful of companies currently offers floating rate bank loan funds including Eaton Vance, Merrill Lynch, Morgan Stanley Dean Witter, Pilgrim America and Van Kampen. The first such fund was introduced in 1989. But the Stein Roe floating rate fund will be the first to be offered in the no-load distribution channel, said Brian Good, Stein Roe vice president and co-portfolio manager. Good is one of a team of four actively managing the fund. All four left Van Kampen a few months ago and joined Stein Roe.
The introduction of the fund also marks Stein Roe's entry into the quasi-closed-end fund world. This hybrid fund, also known as an "interval" fund, will be offered daily to investors, but investors will only be able to make redemptions quarterly. Despite its closed-end features, the fund will not be listed on any stock exchange.
The Stein Roe portfolio will be made up of senior secured floating or variable rate bank loans made to U.S. corporations and other borrowers. Often companies will opt for a short-term loan from a bank for, on average, two to three years instead of issuing stock or bonds, said Payson Swaffield, co-portfolio manager of Eaton Vance's three bank rate funds. Although these senior loans are below investment grade level, they are the first to be repaid- before corporate bonds, preferred stock and common shares- should a company default on a loan, says Swaffield. Eaton Vance of Boston sponsors two open-end bank loan funds with a combined $6 million under management as well as the new closed-end Eaton Vance Senior Income Trust Fund which had its initial public offering in late-October.
The products appeal to investors for several reasons, said Bob Grossman, group managing director at Fitch IBCA, the bond rating agency in New York. These bank loans are less volatile than high yield junk bonds. In addition, net asset values of the loan participation funds tracked by Lipper Analytical have remained virtually unchanged since the beginning of 1991. Investors unnerved by the rollercoaster ride of the equities and high yield markets this past August and September have been looking for assets with less volatility, said Peter Acciavatti, of Chase Securities, the broker/dealer subsidiary of Chase Manhattan Bank.
Also, because the "floating" interest rate paid is reset on average every two months, there is little interest rate risk. Bank loan funds are "on the defensive end of the riskier asset class," Grossman said.
Moreover, bank loan default rates over the last few years have been low. A 1997 Fitch study showed that bank loan recovery rates averaged 82 percent, while recovery rates of other debt securities of the same companies averaged roughly half that. Also, the loans are secured by a company's collateral such as office space, real estate and inventories, said Good.
Stein Roe will initially be offering the new fund to existing institutional and high net worth clients. But, it also plans to eventually market the fund at both Charles Schwab's and Fidelity's institutional fund supermarkets which cater to financial planners. The fund will also be made available through Colonial Fund Group, a Stein Roe load fund affiliate in the future.