Franklin Templeton Investments is set to launch in April its first open-end loan fund, joining Fidelity Investments and Eaton Vance on that front and illustrating an increasing comfort with the liquidity of loans as an asset class. Chauncey Lufkin, portfolio manager at Franklin, told Fund Action, an LMW sister publication, that the company decided to launch the open-end fund because it had already seen financial advisors start to move assets to the open-end offerings from Fidelity and Eaton Vance. Additionally, from an investment standpoint, Lufkin said liquidity has improved dramatically in the sector. "There is increased demand for a daily liquidity fund, and we feel the liquidity is there. We know we can trade these loans."
Just a half year ago, there was no such thing as an open-end loan fund, with managers pointing to the historical lack of liquidity in the asset class as the major obstacle. But in the second half of 2000, Fidelity launched not only its first loan fund, but the first-ever open-end loan fund, a move soon followed by Eaton Vance. With some marketing officials now predicting that most new flows into loan funds will be attracted by the open-end offerings, heavyweight Franklin Templeton felt the need to join Fidelity and Eaton Vance with an open-end offering.
Lufkin said that for the open-end fund the company will keep a bit more cash on hand, but it will be a straight bank loan fund. He said, for example, the fund will never be as low as 4% in cash, which is what the company's closed-end portfolio currently keeps in cash, and will more likely hover between 10%-20% in cash. Franklin has an existing line of credit in place with Citibank for its loan fund business, which it could tap to meet redemptions in the new fund if necessary, Lufkin said. Down the road, as the fund grows the company will probably look to set up a syndicated line of credit with a number of banks in the $200 million range. Lufkin said banks that could be tapped if asset growth requires an additional line of credit could include Chase Manhattan Bank, Citibank, Bank of America and Bank of New York.
Eaton Vance has two open-end loan funds. The first included a high-yield component to generate additional yield while offsetting concerns about the liquidity of a strictly bank loan open-end fund, but the second, just launched at the beginning of February, is a straight bank loan open-end portfolio. The Fidelity offering includes a money market component to offset liquidity concerns. "These funds are where we anticipate all the new money into loan funds will be going," said an Eaton Vance marketing insider.