Hey, investors: Want to buy some corporate debt?
These days, that is a prospect that most individual investors would approach gingerly, given recent high-profile corporate bankruptcies, market anxiety over telecommunications debt, and the prospect of rising interest rates, which typically decimate returns from fixed-income instruments.
But some financial advisers say bank-loan mutual funds, which buy bundles of corporate loans initially made by banks, can make investing sense, especially now. Despite last year’s corporate-debt woes, many of these funds held up well. Moreover, they also tout something of a cushion against the interest rate increases that many analysts predict are only a matter of time.
Bank-loan funds, also called prime-rate or loan-participation funds, won’t supercharge your portfolio.
But results within the group can vary greatly, depending on which company a fund holds. For example, Morgan Stanley Prime Income Trust, with $1.9 billion in assets, lost 5.92% last year — in part because of loans it held to such troubled telecom companies as Global Crossing Ltd., Teligent Inc `A` (TGNTQ) and 360networks Inc.
Nor are bank-loan funds a substitute for much safer — if low-yielding money market funds and certificates of deposit. Along with their benefits, bank-loan funds also carry their own risks. Many of the funds also have an unusual structural catch: While investors can buy shares at any time, they can only sell shares once a quarter. Some of the newer funds don’t carry such restrictions, but many older funds do.