Fear of rising rates can sow the seeds of bad behaviour

It may be better to do nothing than to try to reposition for rising rates.

Phillip Yoo 8 May, 2018 | 5:00PM

Investors have been fretting over rising rates for years now, and many have been trying to reposition their portfolios to shield against the negative effects of higher rates on their fixed-income investments. In some cases, their attempts to do so have yielded results that pale in comparison to a do-nothing approach.

Consider  PowerShares Senior Loan Portfolio (BKLN), the U.S.-sold parent fund of PowerShares Senior Loan ETF (BKL.F); the U.S. version has been a popular choice for investors looking to lessen the risk of rising rates, as evidenced by its hefty US$8.3 billion in assets as of the end of April, as well as its erratic flows. It is also perhaps the poster child for the futility of investors' efforts to stay a step ahead of rate hikes by central banks.

Senior loans have little sensitivity to interest-rate risk, as their coupon payments float with prevailing interest rates and typically reset once a quarter. As a result, these loans' duration tends to hover near zero, making them ideal to insulate losses from rising rates. Consequently, as investors have become increasingly concerned with rate hikes, senior loan funds such as BKLN have garnered a lot of attention.

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About Author

Phillip Yoo

Phillip Yoo  Phillip Yoo is a manager research analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers passive strategies, focusing on fixed-income exchange-traded funds across the credit spectrum.

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