Investment trust insider on debt funds – James Carthew: Float your eye over debt funds
As interest rates continue to climb, the future returns available from debt funds are looking more interesting. However, the picture is clouded by concerns about defaults. Some closed-end funds that should probably be raking in new money from investors are languishing on discounts.
There are 24 listed debt funds currently, but only seven of these have been around for more than 10 years. For a long time, it was not tax-efficient to invest in bonds through a UK-domiciled investment company structure. Then we had the global financial crisis. The low interest rate environment that followed killed the appeal of most funds. The result is that many of these funds are sub-scale and, of those 24, five are in wind down mode.
One of those is NB Distressed Debt (NBDD). For many years, what should have been a rewarding asset class was compromised by policymakers’ penchant for propping up the economy rather than permitting a recession. Consequently, there just have not been sufficient distressed debt opportunities for the fund to exploit. It may be that this changes in 2023, but it will be too late for this fund.
Debt funds are arranged into three groups – those making direct loans to borrowers, those investing in loans and bonds, and those investing in structured finance.
The direct loan funds are… read more here