Are bank loan funds like catnip for investors?

Last year, people looking for an alternative fixed income invested in MLPs. But now, bank loan funds are all the rage.

Hal Stoelzle/Newscom/File
Mickey, a domestic shorthair, checks out live catnip at the MaxFund Animal Adoption Center in Denver in this file photo. Guest blogger Joshua M. Brown writes that investors are going crazy for bank loan funds by buying into them like there's no tomorrow.

Investors seeking "alternative fixed income" went mad for MLPs last year - the steady income from pipelines along with oil & gas royalties was like catnip for those seeking yield without the interest rate risk.

The trouble is, the Alerian MLP Index was up almost 36% last year and even the most bullish observers aren't expecting a repeat performance in 2011.

So where is the interest rate-averse crowd heading? They're buying into bank loan funds like there's no tomorrow. Investment News has the scoop...

Bank-loan funds attracted $5.62 billion net new money in January, a monthly record, according to Chicago-based Morningstar Inc., as investors sought protection from the possibility that a stronger economy and accelerating global inflation will force up U.S. interest rates. Unlike bonds, which lose value when rates climb, bank loans have coupon rates that float with short-term interest rates, minimizing declines.

I've sniffed around some of these funds, they don't really turn me on. Most of the yields look 4 percent-ish right now and, like MLPs, it's not like the average floating rate bank loan portfolio just sat around last year - these things were hot also.

If you don't know much about these funds, here's the Morningstar Classroom for the category.

You can also head over to the article below, your fellow investors are all over this stuff so you should at least understand how they work.


Bank loans: Get 'em while they're hot (Investment News)

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