KJH Senior Loan Fund
What is the investment objective of the KJH Senior Loan Fund?
The investment objective is to generate stable and consistent income while minimizing long term volatility. The portfolio will be focused on the broadly syndicated U.S. loan market where higher yields are earned from corporate borrowers that are generally non-investment grade rated. Repayment priority and security over assets help mitigate credit loss while floating-rate coupons reduce interest rate risk. The manager will attempt to generate alpha by constructing a highly diversified portfolio and applying astute credit selection to avoid default loss. Currency hedging, concentration limits and commodity sector avoidance further limit volatility.
What does the KJH Senior Loan Fund invest in?
The Fund predominantly invests directly in senior loans that are first priority, secured, term loans with floating-rate coupons issued by well-known companies. The Fund generates income primarily from interest coupon payments on the loans, while downside risk management and protection come from the first-priority (or lien) over all of the corporate issuer’s (the borrower’s) assets, meaning the loan holder has the right to sell assets of the company in order to get their money back. In addition, the fact that these loans have floating-rate coupons (the coupon payments move up and down with the level of interest rates) assist in mitigating interest rate risk.
Why this asset mix?
As yields on middle-market debt come down, investors have turned to senior loan funds to generate higher returns. However, in Canada the banks dominate the senior loan space by bulk-buying and syndicating Canadian dollar senior loans to other banks; rendering the asset class inaccessible to the retail investor universe. This results in Canadian investors being underexposed to the asset class.
What is the role of the KJH Senior Loan Fund in your portfolio?
Historical data demonstrates that exposure to senior floating rate loans in a fixed income portfolio typically improves the risk-adjusted return due to reduced interest rate risk as well as the lack of correlation to other assets.