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Leveraged loans: Senior, secured and increasingly systematic The case for a strategic allocation

September 30, 2026

Srinivasan Margabandu

Fixed Income Portfolio Specialist

Executive Summary:

A core allocation, not a tactical trade. Leveraged loans have matured into an approximately $2 trillion global asset class that increasingly belongs in the strategic core of institutional portfolios, offering senior secured, floating-rate income with near-zero duration.
A differentiated, well-rewarded return stream. High carry, first-lien protection and low rate sensitivity deliver one of the strongest returns-per-unit-of-risk in fixed income, while diversifying away from duration-heavy bonds and richly valued equities.
A now genuinely indexable market. Record secondary volumes, rapid electronification, faster settlement, deep CLO (Collateralized Loan Obligation) demand and credible benchmarks have, for the first time, made loan beta accessible with public-market transparency and cost efficiency.
A constructive entry point. Elevated all-in yields, a cautious-central-bank and sticky-inflation backdrop, and credit stress that looks selective rather than systemic together reinforce the near-term case.
Access is shifting from active to systematic. In a carry-dominated, callable market, persistent alpha is structurally hard to sustain—reflected in the near-universal, multi-year underperformance of active loan funds net of fees.

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Investments in Senior Loans are subject to credit risk and general investment risk. Credit risk refers to the possibility that the borrower of a Senior Loan will be unable and/or unwilling to make timely interest payments and/or repay the principal on
its obligation. Default in the payment of interest or principal on a Senior Loan will result in a reduction in the value of the Senior Loan and consequently a reduction in the value of the Portfolio’s investments and a potential decrease in the net asset value (NAV) of the Portfolio. Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. The fund is subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal.

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Investments in Senior Loans are subject to credit risk and general investment risk. Credit risk refers to the possibility that the borrower of a Senior Loan will be unable and/or unwilling to make timely interest payments and/or repay the principal on its obligation. Default in the payment of interest or principal on a Senior Loan will result in a reduction in the value of the Senior Loan.

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