U.S. mutual funds that focus on speculative-grade corporate loans are underperforming a benchmark as investors stage the biggest retreat from the market since 2011 and regulators warn of lax underwriting standards.
Returns of 2.1 percent this year for such funds tracked by Morningstar Inc. are falling short of the 2.5 percent gain in the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index. In all of last year, the funds rallied 5.7 percent, versus 5 percent for the gauge.
Mutual fund managers are struggling with redemptions swelling to $7.4 billion since April following record net deposits of $57.4 billion last year when investors sought debt that helped hedge against rising interest rates. Those higher rates have failed to materialize, while the Office of the Comptroller of the Currency has warned that underwriting standards are weakening and may lead to bigger losses than in previous cycles.
“When you have large inflows and outflows, that’s expensive” because you have more trading costs, Mark Okada, Chief Investment Officer of Dallas-based Highland Capital Management LP, said yesterday in a telephone interview.
Sitting on higher cash balances to manage withdrawals can also eat into returns, said Okada, who is also co-founder of the firm.
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