Since October 1989, the risk-adjusted return for bank loans has exceeded that of stocks or bonds. From 1992 through 2002, the CSFB (Credit Suisse First Boston) Leveraged Loan Index had an average annual return of 6.5 percent. During this period, bank loans proved remarkably consistent, with positive returns in all 11 years. So far in 2003, bank-loan funds are up a similar 6.5 percent, according to Morningstar Inc.
Floating-rate loans are similar to adjustable rate mortgages: companies borrow money from banks and pay a premium over short-term interest-rate benchmarks. Bank loans have interest rates that re-set every one to six months so they present very little interest-rate risk. In fact, bank-loan funds can benefit from a rising interest rate environment, particularly if the economy improves, curbing defaults.
Morningstar puts the average yield from these funds at 4.2 percent today; if interest rates rise from current lows, so will the yields from these funds. Bank-loan funds with histories stretching over 10 years include Van Kampen Prime Rate Income, Eaton Vance Prime Rate Reserves, Merrill Lynch Senior Floating Rate, and Morgan Stanley Prime Income Trust.