Neuberger Berman Floating Rate Income (NBLS) invests in senior secured floating rate loans, offering investors access to a low duration fixed interest portfolio with the potential for stable or rising income in a rising interest rate environment. Crucially, the value of the loans shouldn’t fall as rates rise, as is the case with fixed coupon bonds.
Given the average price of loans in the fund has fallen to 94.5p there is also some potential for capital gains in the short term, although given the structure of the loan market the trust doesn’t offer long-term capital growth prospects.
Based on the Q3 dividend (and annualising it), the trust currently offers a prospective yield of 4.9%. LIBOR rose steadily through 2018 and there was a significant step up in the dividend in October (Q2). Although LIBOR has continued to rise since then, the dividend was little changed in January thanks to the lag between rate rises and coupon increases, so we think the likelihood of a dividend increase in April is high.
LIBOR depends on the Fed funds rate, and although there have been some indications the Federal Reserve board members are open to a pause in the rate hiking programme, their median forecast of the short-term interest rate at the end of 2019 is 2.9%, up from 2.3% this year, implying a roughly 60 basis points rise in the coupon on floating rate loans. As such, US LIBOR is likely to continue to rise, and there is therefore scope for further increases in NBLS’s dividend this year.
The trust is trading on a discount of 4.7%, and the board has been highly active with buybacks once the discount widened beyond 3%.
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Fund History: NB Global Floating Rate Income Fund
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