Sveen has been head of trading for Eaton Vance’s floating-rate loan strategies team for roughly 20 years. He became a co-portfolio manager of this fund in 2019, and in June will become the lead manager after longtime lead manager Craig Russ retires. In a research note, Morningstar analyst Gabriel Denis said Russ’s departure shouldn’t “dent this stalwart bank-loan strategy,” and cited Sveen’s experience, as well as the two new co-managers and the research team, as reasons he’s confident in the fund’s continued strength.
Rising Rates
The Floating-Rate Fund’s average annual share price return over the past 15 years was 3.62% as of March 9, which tops the mutual fund bank-loan category by 46 basis points, according to Morningstar. But it’s important to remember that the focus of the product is actually on the yield generation and principal protection.
Eaton Vance also touts the diversification benefits of floating-rate loans, noting they have a negative correlation with traditional bonds. It’s reasonable to expect that rising interest rates will boost yields across the fixed-income spectrum, and that might push investors toward more secure issues—U.S. Treasurys or high-grade corporate bonds—instead of risker ones like non-investment-grade floating-rate loans. But Sveen argues investors can lose money in investment-grade bonds, since bond prices fall when interest rates rise. Plus, the yields currently offered by much of the investment-grade-debt space remain low by historical standards.
He notes the Fed is primed to raise interest rates to curb inflation in the midst of a strong economic cycle. “So it’s not a time to be fearful of corporate credit risk,” Sveen says. “Our portfolio—and the index in general—have a default rate of a fraction of 1% right now. That’s reflective of a very strong backdrop for corporate credit. With low defaults come minimal write-offs, and therefore we feel very confident about the companies in the portfolio.”
Risk Analysis
Sveen says Eaton Vance’s approach to floating-rate loan portfolio construction hasn’t changed much over time. He and his team scour the investable universe and eliminate the smaller and riskier names that come to market. The smaller ones are weeded out, he notes, because bigger issuers have more resources to help them through troubling times.
“It’s not worth going after small companies when you can accomplish the same thing going after big companies,” he says.
As for ferreting out riskier offerings, Sveen says that in most market environments the incremental income produced by riskier deals doesn’t offset the additional risk being taken on. “At the same time, we’re not afraid of risk because if we were we would be nowhere. But we’re very thoughtful about risk and about relative value analysis, and we have some of the best systems and capabilities for evaluating relative value.”
The portfolio is risk-weighted according to a fundamental analysis of each holding’s credit risks. The fund takes a bottom-up approach when evaluating individual loans in particular industries.
“In select circumstances we’ll block out certain industries, but that’s rare,” he says. “Usually, we’ll keep an open mind from a bottom-up perspective.”
That said, the team likes some industries more than others, such as the software space, which Sveen says has lots of recurring revenue and tends to be a little bit lower rated because the companies take on leverage.
“But because of their consistent cash flows, they’re very stable investments and very good for senior secured debt,” he explains.
He adds that the fund’s turnover rate of 26% is around the norm in all but the most extreme market environments. In many cases, holdings exit the fund because of the issuers’ refinancing. In other cases, the managers have an internal rating system, and an analyst downgrade will prompt selling activity.
Sveen and his team also manage the slightly larger Eaton Vance Floating-Rate Advantage Fund, (which has $9.2 billion in assets while the Floating-Rate Fund holds $8.8 billion). The Advantage fund began trading in 1989, and the company says it’s the oldest extant fund in this space. Its recent distribution yield of 3.98% was 77 basis points greater than that of the Floating-Rate Fund, but that’s because it employs 20% leverage. So for every dollar an investor puts in, they’re buying $1.20 in bank loans.
Either way, Sveen believes the floating-rate asset class is in a good place right now, particularly for investors who want more yield and diversification than what’s currently offered in much of the fixed-income world.
“With our asset class, [loans are priced] a little below par, and we’re getting what we think is a fair coupon for the risk we’re taking. It’s favorable relative to historical coupons we’ve realized, with upside potential thanks to the likelihood of rising interest rates.”