Walter Shulits (vicepresident, institutional bank loan relationships, Eaton Vance Investment Managers): This is really the only asset class you would find that has short to intermediate duration, non-investment grade and floating- rate, and it is the only floating rate asset class that has demonstrated liquidity over close to 19 years. If you were to take the annual returns currency-adjusted into Aussie dollars, you would be between 8.5 and 9 per cent a year. And that would include the decline in 2008. Michael Bailey (journalist, Investment Magazine): To the asset allocators here, how have bank loans fitted into your clients’ portfolios in the past? What about the criticism that there is equity correlation built into the asset class? Scott McNally (investment consultant, Sovereign Investment Research): We’ve seen loans as something that could be included within a defensive alternative portfolio. Until 2008, the spreads didn’t look particularly attractive, and actually none of our clients had allocated to bank loans, at least directly.

They might have had exposure through other sorts of credit managers, but not in terms of the specialist alternative managers we advise on. From mid-2008, things began to look a bit more attractive – it was probably lucky that our clients didn’t allocate at that point. But from here, although there has been a strong rally, there is probably a place for something like bank loans with a reasonable spread over a cash base. Sue Wang (senior associate, manager research, Mercer Investment Consulting): Mercer’s Aussie clients have typically not really understood where bank loans fit. Should it be in the fixed-income bucket? Alternatives? To me it straddles somewhere between those two. Very few Aussie clients have allocated directly to the space. However, for quite some time now, they have featured loans as a potential sector within, let’s say, a multi-sector strategy they might have with a fund manager, and they’ll allow that manager to allocate into loans when they see attractive valuations there.

Obviously we had the GFC come through and valuations looked very attractive at certain points, and some of our more sophisticated, larger clients have certainly considered doing direct allocations at that point. So we’ve had a few clients make that opportunistic call, although not as many as I would have liked, because it’s more difficult for less sophisticated clients to understand the structure. I think it’s an asset class where clients are increasingly comfortable to allocate more, but in terms of giving managers leeway through a multi-sector type product. Brad Bugg (head of fixed income & currency, Ibbotson Associates): We see loans as the riskier end of fixed income, because with fixed income within our balanced portfolio, it’s there to be a diversifier and provide a defensive allocation. We’re cognisant that in the GFC, the correlations of pretty much all riskier sub-asset classes of fixed income went to one. So we are wary, when we’re looking at bank loans, as to what we should be comparing them against.

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