Plan sponsors and investment consultants are eyeing bank loans as a stand alone investment after years of pension funds passing on the bank debt market, according to LMW sister publication Money Management Letter. This interest, partly spurred by the prospect of rising interest rates, could result in a move away from high-yield managers toward bank debt. John Geissinger, cio of Bear Stearns Asset Management predicts, based on his discussions with plan sponsors, "a migration from high yield mandates to bank loan mandates," adding that this is how most pension funds will get into the asset class.
The buzz surrounding bank debt has been building since as December 2001 when the California Public Employees Retirement System made a $350 million commitment to Highland Capital Management as part of a high-yield allocation. The Massachusetts Pension Reserve Investment Board last October kicked off a $900 million alterative high-yield search, which included a look at bank debt managers. It is, however, the interest on the part of consultants that has really got the industry salivating. Managers said they believe if they can get the consultants on board they can open the doors to a new pool of previously untapped investors.
Danielle Muller, co-head of fixed income research with investment consultant Rocaton Investment Advisors, said her firm began looking seriously at bank debt as a possible investment vehicle at the beginning of this year. She added that Rocaton may recommend some clients carve out a separate allocation to investment strategies, including bank debt, to provide a hedge against inflation. Meanwhile, Tim Barron, head of research at CRA RogersCasey, another consultant to pension funds, said bank debt is something his firm has been looking at as part of a broader discussion of what clients should be doing with their fixed-income portfolio. Other consultants who have shown an interest in this asset class, and have clients which have reportedly already made commitments to this area, include Wilshire Associates and Hammond Associates, according to asset managers who have spoken with the consultants. Officials at Wilshire and Hammond did not return calls.
Loan managers are unlikely, however, to see a massive spike in allocations and search activity from the defined benefit market in the immediate future. As with most new investment ideas, plan sponsors and consultants are approaching the asset class with caution. Muller said her firm is very much in the review stages and has not begun pitching the idea to clients. "It is a capacity constrained asset class," she said. Problems may arise if interest from investors transforms itself into real money resulting in a large inflow of capital chasing the available deals. Justin Driscoll, head of BSAM's loan group, responded that while a significant amount of new assets could pose a short-term problem, BSAM typically draws down assets from a new account over a period of four-to-six months. Once the capital is invested, Driscoll said he does not perceive much of an issue.
But many plan sponsors also remain unconvinced. Bill Atwood, cio of the $9.5 billion Illinois State Board of Investments, said that he has yet to be persuaded that there is a niche for bank debt in his overall asset allocation. "Like it or not, I am in the business of filling boxes," said Atwood, adding his fund does not have a bank debt shaped box and with many other investment issues requiring attention, the fund is unwilling to carve one out.