According to Morningstar Inc., Chicago, the bank-loan fund category has had positive returns every year for more than a decade. In 2003, the average total return was over 10 percent, bringing the 10-year average up to 5.5 percent. Currently, the average yield is 3.7 percent.
Bank-loan funds have their own risks, though: a slight risk of capital loss. The loans in these funds’ portfolios may have been made to corporations in less-than-stellar financial condition, which might default. Although the loans are secured, in some cases the collateral backing these loans is insufficient to repay the debt or repayments are delayed.
Defaults, therefore, can drag down the returns of such funds. In 2001 and 2002, when the economy staggered, bank-loan funds gained a mere 1.59 percent and 0.64 percent, as a category. Some funds actually lost money in those years.
Going forward, though, 2004 and 2005 shape up as an excellent time for bank-loan funds. If interest rates rise, as expected, yields will move up. In addition, an ongoing economic expansion probably will mean fewer defaults on the bank loans these funds have purchased.
