From a Reader:
Floating Rate Funds — Do you have any thoughts on these investments. I don’t want to be involved in something that is going to blow up.
In general, I like bank loans because:
- Default rates are low.
- They are senior in the capital structure, so losses are small when they happen
- They float with short-term rates, which are zero now, so they can only go up
Here’s the problem though. Enough people know that such that ALL of the closed-end loan participation funds trade at a premium to net asset value. I have never seen this before.
I would avoid the asset class, unless you buy into the non-traded funds, which price at book value. Bank loans tend to have low default rates, and when they do default, losses are smaller than for bonds.