In a recent article, my colleague Phillip Yoo highlighted developments and risks in the bank-loan market, including rising leverage ratios, the proliferation of so-called “covenant-light” loans, and the liquidity risk inherent to the asset class. These challenges all have implications for how we evaluate actively managed funds in the bank-loan Morningstar Category.Credit Research Is ParamountBank loans are higher in the capital structure than bonds, so they have a better claim on a company’s assets in the event of a restructuring and have historically featured higher recovery rates than high-yield bonds. As a result, they are often viewed as a more defensive way to access credit risk. That said, most bank loans carry below-investment-grade ratings, and there are plenty of risky loans out there, including those … Full Story

The number of complex investment strategies available to investors has never been greater. But most investors are probably still best served by a few simple, market-cap-weighted index funds.One of the pre-eminent reasons for the popularity of index-tracking funds revolves around the notion of market efficiency--the idea that the market quickly and accurately incorporates all available information about a public company into its stock price. This all-knowing market mechanism makes it difficult to identify stocks that are mispriced, so the logical conclusion is that you should simply own the index and take advantage of the market's long-term aggregate growth. This is a mostly valid argument (there are times when the all-knowing market can be a bit of a know-nothing), and one that I would largely agree with. But the rationale for using a … Full Story