Institutional investors have begun nibbling at bank loan strategies, but their ranks could grow rapidly if interest rates rise.
With the yields on the loans held for those strategies reset every quarter to reflect short-term interest-rate movements, more tax-exempt investors are giving the segment a look as they anticipate damage to their broader fixed-income portfolios when rock-bottom rates finally begin a sustained rise.
Trends are “certainly moving in a meaningfully positive direction,” said Gregory Stoeckle, a managing director and head of the New York-based global bank loan team at Invesco Ltd. which oversees more than $13 billion in institutional bank loan assets.
The number of institutional dollars awarded to bank loan managers during the first quarter of 2011 appears to be almost 50% higher than a year earlier, as more investors look to hedge the risk of rising rates, Mr. Stoeckle said.
Institutional investors pulling the trigger in the first quarter included the $7.2 billion Delaware Public Employees Retirement System, Dover, and the $1.5 billion Arlington County Employees Retirement System, Arlington, Va.
The board of the Delaware pension fund voted to shift $150 million to the T. Rowe Price Institutional Floating Rate fund from a Mellon aggregate bond index fund, according to minutes of the board's Jan. 28 meeting. David C. Craik, state pension administrator, couldn't be reached for comment.
The Arlington County board approved plans to trim the system's S&P 500 index exposure by $50 million and shift that money into the same T. Rowe Price fund.
Daniel Zito, executive director of the Arlington County plan, said his board was looking to trim equity exposure following the market's strong gains, and given the risk-reward trade-offs the system's portfolio is facing now under a variety of economic scenarios, bank loans appeared attractive relative to other fixed-income investments.
Justin Gerbereux, a bank loan portfolio manager with T. Rowe Price Inc., Baltimore, said the number of bank loan-focused requests for proposals and requests for information his team has seen during the first quarter of 2011 is roughly equal to the combined total for the previous two years. T. Rowe manages $1.4 billion in bank loan strategies.
That pickup in interest over the past three to six months reflects the view that the economy has recovered sufficiently to take the risk of deflation off the table, noted Martin Jaugietis, a senior consultant with Seattle-based Russell Investments.