I would urge people to maybe focus on the spread, think about a different interest rate environment. You talk to high-yield managers, and they absolutely believe there is no duration in high-yield, that it’s uncorrelated with rates. And yet if you go back and peel apart the returns for the last 10 years in high-yield bonds, you will find that credit actually had a negative contribution to the total return. Yet people don’t really discuss high-yield in that way, because they look at it and say, ‘Oh, I bought it at the bottom, sold it at the top.’ Granted, it’s hard to get people to look at loans, because we have this ride we took for the last two years, which I think has its own unique fact set. But if you had put a 10-year bond, like high-yield has, into bank loans, I think that people would be looking at it differently.

So as rates rise, I think loans deserve a place in portfolios because the arithmetic on bonds in a risingrate environment is really harsh. The discussion turned to the performance of bank loans during the GFC. Their limited liquidity meant that at one point they traded at 65 cents on the nominal dollar, however Page maintained that this was because the loans could be traded, unlike asset classes which were not “tested”, such as private equity. Walter Shulits: We’re used to hearing these comments about when risk assets begin to fall, loans fall. Well, the asset class was managed during the Drexel Burnham crisis with positive returns. It was managed during LTCM, Asia, SARS, Telecom Media with positive returns. In all these high-default periods, we had positive returns. During those three cycles, recovery rates were in the 70 per cent range. Now, 30 years of declining rates catalysed the proliferation of CLOs and leveraged hedge funds. Somebody coming out of a French graduate school could build a 10-times levered fund. And what they bought was bank loans, because banks loans had the highest spread.

When the GFC occurred, you had margin calls on these portfolios, and of course, the portfolios went down. They went down to those extreme levels because they could be traded, and the liquidity was there. They came back up to the same levels because people realised that the default characteristics were no different from the three previous troughs, so they came back equally as rapidly, and unlike distressed debt, or some of the RMBS or CMBS, you could identify the price at which you were going to buy these things. Clive Smith: I think the question of a strategic allocation to bank loans comes back to the question of what is the role of them? If an investor is considering their domestic fixed-income portfolio, then loans are an exbenchmark exposure. For loans to become a strategic allocation, you’re probably taking them out of your fixed-income bucket and moving them towards alternatives.

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