First Trust says its newest offering is geared to capitalize on the relatively attractive yield within the senior loan market while seeking to mitigate interest rate risk.
“With interest rates at historically low levels, these are challenging times to invest for income. At the same time, many believe there is nowhere for interest rates to go, but up,” the asset manager said in a presentation on FTSL. “In this environment, many investors are seeking alternative sources of income, including those which have historically reacted favorably during periods of rising interest rates such as senior loans.”
Bank loans have a floating-rate feature which typically resets every one to three months based on short-term interest rates.
“It is this resetting feature that has the potential to provide protection in a rising interest rate environment. Additionally, senior loans may offer relatively attractive yields compared to traditional fixed-rate bonds and often with less volatility,” First Trust notes. “While senior loans are generally loans which have been made to below-investment grade companies, they are backed by collateral, such as property, and are senior in the capital structure of a company.”
FTSL also offers a potential diversification benefit because of the historically low correlation of senior loans to other asset classes, the firm added.