Cash Cows

Posted by: Lauren Young on January 8, 2008

According to Asian calendars, 2008 will be the Year of the Rat. But for investors, it may well be the Year of the (Cash) Cow.

“Funds are flowing into cash like no time ever before,” says Duncan Richardson, chief equity investment officer of Eaton Vance. According to Richardson—who quotes data from Ned Davis Research—cash flows into money market funds jumped 65% in the past year.

While cash is typically a good place to hide out from market turbulence, the SIV fallout has rocked the cash market. Naturally, Eaton Vance, which is one of the biggest players ($20 billion under management) in the bank loan arena, thinks bank loan funds could be a good place to put some money right now. “It’s really a conservative asset class,” says Scott Page, head of Eaton Vance’s bank loan investment group. “What other investment classes can you use to dampen volatility other than cash?” Page and Richardson spoke to reporters on Tuesday at an Eaton Vance event in New York.

Made by money center banks and other big financial institutions, these loans are used to finance leveraged buy-outs and often other kinds of deals. While not investment grade (which, admittedly, is less of an insurance policy these days anyway), bank loans do have some nice bells and whistles that protect investors. The floating rate loans that comprise Eaton Vance’s biggest portfolios are “senior secured,” which gives them top priority in the creditor pecking order should a borrower hit the skids.

Yields nearing 7% are hard to beat. But perhaps the real lure is that bank loans are cheap. These loans are trading about five points below last year’s levels…so milk ‘em while you can.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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