On Floating Rate Funds

From a Reader:

Floating Rate Funds — Do you have any thoughts on these investments. I don’t want to be involved in something that is going to blow up.

In general, I like bank loans because:

  • Default rates are low.
  • They are senior in the capital structure, so losses are small when they happen
  • They float with short-term rates, which are zero now, so they can only go up

Here’s the problem though.  Enough people know that such that ALL of the closed-end loan participation funds trade at a premium to net asset value.  I have never seen this before.

I would avoid the asset class, unless you buy into the non-traded funds, which price at book value.  Bank loans tend to have low default rates, and when they do default, losses are smaller than for bonds.