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Leveraged loan fund assets surge again as retail investors flock to market

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Leveraged loan fund assets surge again as retail investors flock to market

The retail investor return to the U.S. leveraged loan market, which began in November 2020 after a brutal, pandemic-inspired flight from risk throughout much of 2020, continues to pick up steam.

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Mutual funds and exchange-traded funds investing in loans added a net $6.7 billion to assets under management in April, the largest monthly increase since December 2016 ($9.5 billion) and the sixth straight gain for the segment, totaling $27.2 billion, according to Lipper and LCD.

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The recent activity brings total loan fund AUM to $115.6 billion, the most since the $117 billion in February 2020, before an epic $29 billion in redemptions the following month, as the effects of the pandemic and subsequent shutdowns took root around the globe.

The mushrooming AUM figure is one of several data points highlighting a $1.2 trillion leveraged loan asset class that has been firing on all cylinders this year. Issuance of new CLOs — the other, and much larger component of the loan investor universe, along with retail funds — has totaled some $62 billion so far in 2021, a record pace and up 132% from the same period a year ago, according to LCD. This now-incessant appetite for floating-rate debt has helped boost institutional loan issuance to a whopping $272 billion in the year-to-date, up 157% from this point in 2020.

As was the case in March, loan fund AUM received little help from rising prices in the trading market in April, when the market value change in AUM, per the S&P/LSTA Leveraged Loan Index, was a thin 0.25% ($270 million). This is down considerably from earlier in the market rebound, when aftermarket investors had a target-rich environment in which to buy assets, after the leveraged loan distress level peaked at 57% in March 2020. Since then the distress level has evaporated to 1.12%, while the weighted average loan bid stood at a relatively lofty 98.07 on May 26, leaving considerably less upside in the market.

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About those retail investors: Loan mutual funds and ETFs took in a net $4 billion in April, bringing the year-to-date figure, through the end of that month, to roughly a $14 billion inflow. This is a decided turnaround from 2020, when the market saw some $19 billion in redemptions throughout the year, according to Lipper. And that momentum has continued into May, with inflows totaling $2.3 billion through May 19.