The Invesco mutual fund company is planning to step up its investments in bank loans, in a strategic shift that eventually could pump as much as $3.9 billion into the market.
The company, part of the fund giant Amvescap of Atlanta, plans to put 5% to 10% of its $39 billion in fixed-income assets into bank loans during the next three years.
Such an initiative by a major investment company suggests that the $1 trillion bank loan market has taken another step toward becoming a true capital market rather than the proprietary domain of commercial banks.
"This asset class could not have been integrated like we're doing now five years ago," said Anthony Clemente, manager of Invesco's bank loan group. "There weren't the liquidity and the supply we have today."
Michael Rushmore, head of syndicated finance research at Bank of America in Chicago, said the Invesco strategy is part of a larger movement in the investor community that has had a positive effect.
"We believe the increasing influence of those clients will continue to drive this market to be larger, more liquid, and more efficient, which will in turn create value for our issuing clients," Mr. Rushmore said.
Institutional investors-a group that includes pension funds, insurance companies, and fund companies such as Invesco-have dabbled in bank loans for most of the 1990s. But their inroads have come mainly in the form of crossover buying, usually when bond fund managers invest in loans meeting strict criteria or needs of the fund.
In recent years, however, money management companies such as FMR Corp., Franklin Templeton, and Van Kampen have launched loan funds aimed at both institutional and retail investors.
The number of institutional loan investment vehicles such as mutual or pension funds has ballooned from just 14 at the end of 1993 to 111 at the end of March. During the first quarter, 59 investment companies were active in the bank loan market, compared with just 40 at the end of 1997, according to Portfolio Management Data LLC.
Mr. Rushmore said he is surprised that more fund companies have not made similar strategy shifts.
"The floating-rate debt market is a remarkably attractive relative value from a risk-adjusted yield perspective," he said. "For some investors it represents an opportunity to expand the amount and class of assets under management."
Amvescap has $281 billion under management. Its Invesco unit has long been in the bank loan market; it manages $2 billion in a retail and an institutional fund that invest in such loans.
But Invesco's efforts in the loan market, like those of most money management firms, have been minuscule compared with its corporate bond and stock activity.
That changed in February 1998 when Invesco hired Mr. Clemente, who had been manager of Merrill Lynch & Co.'s $3.2 billion Merrill Senior Floating Rate fund, and Kathleen Lenarcic, who managed the $1.4 billion Pilgrim Prime Rate Trust for Pilgrim America Group Inc.
With the blessing of senior management, Mr. Clemente and Ms. Lenarcic began an overhaul of the bank loan group. Both had experience in credit risk and hoped to build a department that followed not only company credit but performance as well.
They bolstered the research staff and built a new risk management model for the loan portfolios. Unlike many bank or institutional loan models, Invesco's can mark the value of portfolios' assets to market daily.
With a research team and model in place, Mr. Clemente hopes to educate investors and Invesco's own fund managers about the loan market.
Mr. Clemente said those managers will offer buying and selling decisions for those loans to the bank loan group. But, he said, "You're going to see bank loans in every fund in the fixed-income category," he said.
Bank of America's Mr. Rushmore said fixed-income portfolio managers should welcome the strong returns and inherent interest-rate hedge of bank loans.
"The holy grail for asset managers is maximum portfolio return with minimum volatility," he said. "Investors can increase risk-adjusted returns of a debt portfolio by using loans to reduce volatility."