Building a Core Position in Senior Loans
The idea that senior loans have merely a temporary, tactical role to play in a portfolio is outdated. Still, many remain unsure how senior loans fit as a core holding in a broader portfolio. As with the construction of any core position, the best way to allocate strategically to senior loans depends on an investor’s needs and goals. If the primary objective is to increase a portfolio’s income potential, reducing investment-grade bond exposure and investing the proceeds in senior loans may be an ideal solution. If, on the other hand, the goal is to seek lower overall volatility, an investor may wish to pare down the amount of high-yield bonds held in favor of senior loans.
When selecting a specific senior loan strategy to invest in, it is essential to find a manager who has historically delivered the key attributes senior loans have provided. In managing senior loan portfolios for over 15 years, I have found the best way to achieve this is to employ a fundamental, bottom-up investment process. Performing rigorous credit analysis on every issuer in the market is a crucial step toward unlocking value on the most granular level and consistently generating the high income potential, low relative volatility, and diversification potential that investors need in all market environments—not just when interest rates rise.
1 As measured by the Credit Suisse Leveraged Loan Index for the 22-year period ending 12/31/13. The inception date of the Credit Suisse Leveraged Loan Index is 1/1/92. The Credit Suisse Leveraged Loan Index is a composite index of senior loan returns representing an unleveraged investment in senior loans that is broadly based on the spectrum of senior bank loans and includes reinvestment of income (to represent assets). The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any particular investment. Past performance does not guarantee future results.
2 Source: Credit Suisse as of 6/30/14. Past performance does not guarantee future results.
Joseph Welsh, CFA, is head of the high-yield corporate debt team at OppenheimerFunds and is portfolio manager of the Oppenheimer Senior Floating Rate Fund.