One of the largest loan mutual funds in the US stumbled in 2020 after bets on coronavirus-hit airlines and shale producers soured.
Lord Abbett’s floating rate fund suffered a loss of 1.7 per cent in 2020, according to Morningstar data. That compared to a positive return of 2.8 per cent for the Credit Suisse Leveraged Loan index, the fund’s benchmark.
Analysts said the underperformance was relatively severe in a sector characterised by moderate returns, due to loans being higher up in a company’s capital structure and thus more protected than bonds or stocks should it fall into bankruptcy.
Other large loan funds stuck closer to the benchmark. The Fidelity Advisor Floating Rate High Income Fund returned 1.7 per cent in 2020. Eaton Vance’s Floating Rate Fund returned 2.3 per cent.
“The portfolio’s positions in several US-based airlines detracted from relative performance,” noted commentary in Lord Abbett’s annual report, pointing to the hit to demand for air travel due to coronavirus-related restrictions. It also cited weakness in its holdings in the debt of healthcare and manufacturing companies, as well as its high exposure to riskier, lowly rated businesses.
The fund also suffered outflows from pandemic-shaken investors in 2020, taking its assets down $4.3bn over the year to $5.6bn — handing its mantle as the largest US loan mutual fund to Fidelity.
A spokesperson for Lord Abbett said the fund focused on long-term results, and that its more recent performance had been better.
“Coming into the pandemic, the fund was positioned for an improving economy and a continuation of favourable macro trends,” said the spokesperson. “As such, market volatility did impact short-term performance. After that brief period of market dislocation, the fund was repositioned and performance relative to peers has been improving.”
Between February and the end of August last year, the fund halved its holdings of an American Airlines loan due in 2025. Over that time, the loan sank from close to 100 cents on the dollar to a trough of 56 cents at the beginning of August.
The fund’s February 2020 holdings disclose chunks of two loans from aerospace components manufacturer TransDigm. The company’s loan maturing in 2024 plummeted to 76 cents on the dollar in March. Lord Abbett sold the majority of its position in the loan by the end of August, when it had clambered back to 95 cents on the dollar.
The document also shows that the fund, run by Jeffrey Lapin, had a position in the debt of Chesapeake Energy, one of the highest profile casualties of the US shale industry turmoil last year. The company emerged from bankruptcy this week.
The fund also held part of a J Crew loan, with more recent filings showing that the fund now owns an equity position in the retailer, after it went through bankruptcy last year.
“They lost more than their peers on the initial downturn and haven’t recovered as much as others have. If you underperform on the way down and underperform on the way back, it’s going to hurt your relative performance compared to your peers,” said Zachary Patzik, an analyst who covers the fund at Morningstar. “When you add outflows to the mix it makes for a challenging environment for the managers.”
The fund has also taken in fewer assets so far this year as loan funds come back into vogue with investors seeking protection from rising interest rates. Both Fidelity’s and Eaton Vance’s funds have grown faster in 2020, according to Bloomberg data.
More recently, the Lord Abbett fund has shown signs of a turnround, keeping pace with competitors. The fund outperformed its benchmark in the final quarter of the year, on renewed hopes that widespread distribution of a coronavirus vaccine will encourage more people to begin travelling on aircraft again.
Disclosures show that the Lord Abbett fund has increased its exposure to aerospace companies over the past year, by purchasing the debt of United Air Lines, Jet Blue and Delta Air Lines.