The obvious comparison is high-yield. We see bank loans as a more defensive asset class, particularly in this environment where we’ve got rates potentially going up, and we don’t want to be exposed to that duration risk. Michael Bailey: So loans are something that clients compare more to high-yield rather than equities? Brad Bugg: I think so. Clients have looked at the two, and they’ve looked at the returns which they’ve seen in high-yield, and obviously they’ve been more attractive relative to bank loans. But if you are allocating within a fixed-income bucket, you’ve got to be wary of what you’re wanting your fixedincome to do for you. Sue Wang: I’ve had clients say the same thing to me; ‘Should I have some high-yield or should I have some bank loans?’ And to them it’s almost an either/or situation, and at times, one will be more attractive than the other. But historically, if you look at correlations between the two, and if you take out the GFC, correlations are around 50 per cent and below.

So while it’s often the same types of companies issuing them, if you take away the highly levered stuff that came about in those bad vintages, they’re very different products. To me it’s not an either/or story. Stuart Piper (portfolio manager – debt assets, MLC Investment Management): Bank loans were very cheap, now they’ve come back to something that probably looks quite reasonable. But they can become highly correlated to risk assets when risk assets start to fall. Clive Smith (senior research analyst, Russell Investments): It’s a matter of picking the right deals. Sue Wang: Loans are certainly not an asset class (where) you want beta. Scott Page: Bank loans are caught in a statistical hell right now. When people look at the absolute returns of the asset class, they aren’t looking at the spreads. They’re looking at the fact that it was built off this LIBOR base that for most of recent history, has been so low, they think ‘I won’t even worry about these’.

If instead they would focus on the spread – really, with sophisticated clients, they can put any duration they want on that spread. High-yield bonds were just huge last year. It’s so ironic, because they’re subordinated, they’re unsecured. Why would people opt for the riskier side of investment grade credit just as the world just went through this crisis? And the reason was because of the yield curve, they were able to offer 8 or 9 per cent. And the absolute return is what attracted people. If you do an honest analysis through time of the spread of high-yield versus the spread in bank loans – not including the meltdown during the GFC – then loans have a much more predictable, sustainable spread. That’s because it’s senior and secured. I grant you that there is a frothy edge, as there is a frothy edge to every asset class. But it’s unfair to now say, ‘Oh, well it was perfectly correlated in the GFC, so now it’s a highly correlated asset class with mediocre recent returns.’

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