How a Strategic Allocation to Loans Can Shine in 2026

We anticipate resilient—if moderating—credit fundamentals, positive technicals, and compelling relative value versus other major asset classes. Loans have a unique mix of senior secured positioning, floating-rate income, liquidity, and attractive starting yields that historically have benefited from this kind of environment.

The macro backdrop is a mixed picture. Growth is slowing but remains positive, inflation is proving stickier than many expected, and markets continue to debate the ultimate path of interest rates. At the same time, valuations are stretched across equity and fixed-rate bonds, and appear vulnerable to disappointment. In contrast, loans offer a differentiated return profile: income that is contractually assured with limited duration exposure.

Importantly, 2026 appears increasingly defined by a rare alignment of policy forces. Monetary policy is easing, fiscal policy remains accommodative, and deregulation is emerging as a new bullish driver for capital markets. While these forces do not eliminate risk, they meaningfully reduce the probability of a deep, systemic downturn and tend to favor carry-oriented credit strategies. Taken together, we believe loans remain attractive as both a strategic allocation and a potential portfolio stabilizer.

Macro Backdrop: Slower Growth, Persistent Inflation, Policy Support
Growth: Deceleration, Not Contraction

• Economic growth has clearly cooled from post-pandemic highs, but the prevailing environment remains one of deceleration rather than contraction, which historically has favored senior secured credit more than equities. Importantly, slower growth reduces the likelihood of aggressive tightening in financial conditions, or a sharp downturn that would make the tightening unnecessary.
• Consumer activity has moderated, particularly at the lower end of the income spectrum, but remains supported by employment levels that are cooling gradually while avoiding collapse. This dynamic continues to provide a baseline demand for goods and services and reduces the risk of a sudden earnings air pocket for leveraged issuers.
• Corporate confidence has improved as policy uncertainty has receded. While capital spending remains selective, management teams appear increasingly willing to invest and transact, particularly where financing conditions are stable and predictable.

From a credit perspective, this environment favors carry-driven returns over capital appreciation, and may benefit from a secured profile—factors that have historically aligned well with loan market performance.

Inflation: Sticky Enough to Shape Portfolio Construction

• Inflation has moderated from peak levels, but progress has been uneven, particularly in services and labor-intensive sectors. Wage dynamics, supply constraints, and pricing power in certain industries continue to limit the pace of disinflation.
• While inflation expectations remain relatively well anchored, realized inflation has been persistent enough to keep policymakers cautious and markets sensitive to data surprises.
• For investors, this environment heightens the importance of inflation-aware portfolio construction. For example, long-duration bonds, like 10-year U.S. Treasurys – a mainstay of many portfolios -- are particularly vulnerable to renewed inflation volatility. An allocation to a zero-duration position, like floating-rate loans, can help mitigate this exposure.

„Importantly, 2026 appears increasingly defined by a rare alignment of policy forces. Monetary policy is easing, fiscal policy remains accommodative, and deregulation is emerging as a new bullish driver for capital markets."

A Trifecta of Policy Support in 2026
We expect that the alignment of three major policy levers—monetary, fiscal, and regulatory—will collectively create a more constructive backdrop for credit markets.

Monetary Policy: Less Restrictive, Even If Uneven

• Global central banks, led by the Federal Reserve, appear to be past peak restrictiveness, with policy moving from outright tightening toward a more neutral or easing stance.
• Even a modest reduction in front-end rates can materially reduce interest burdens for leveraged issuers, improving cash flow generation and interest coverage.
• Importantly, loans do not require an aggressive easing cycle to remain attractive; they benefit across multiple rate paths, including scenarios where long-term yields remain elevated or volatile.

Fiscal Policy: Structural Accommodation

• The U.S., like many developed economies, continues to operate with persistent fiscal deficits, reflecting structural spending commitments and political resistance to near-term austerity.
• With an election cycle underway, the balance of risks favors continued fiscal accommodation rather than meaningful restraint.
• Fiscal accommodation tends to cushion downside risks to growth, reduce the likelihood of a sharp demand shock, and enhance revenue stability for leveraged issuers.

Rising deficits are likely to help keep a floor under long-term yields, thus limiting the upside potential for long-term bonds, while favoring the relative appeal of floating-rate credit.

Deregulation: An Emerging Tailwind

• Deregulation appears to be the next policy initiative that is likely to bolster market confidence and capital formation.
• Recent developments, including the repeal of leveraged lending guidance, signal a more permissive stance toward bank participation and market intermediation.
• Historically, deregulatory environments have supported refinancing activity, M&A volumes, and overall market liquidity—all positives for the loan market, when paired with disciplined underwriting.

Credit Fundamentals: Resilient on Average, Increasingly Dispersed
Corporate Performance and Balance Sheets

• Earnings growth among leveraged issuers has moderated but remains positive on average, with notable variation across sectors and business models.
• Margin pressure persists in certain industries, particularly those exposed to labor costs or cyclical demand, while others continue to benefit from pricing power or secular growth trends.
• Management teams have largely adopted conservative postures, prioritizing liquidity, cost control, and balance-sheet flexibility after several years of elevated financing costs.

Defaults and Liability Management

• Default activity remains manageable in a historical context, with stress concentrated in a relatively small subset of issuers rather than broadly distributed across the market.
• Liability management exercises (LMEs) have become more common, reflecting issuer efforts to extend maturities or proactively address capital structure challenges.
• Thus far, LMEs have functioned more as time-buying mechanisms for individual companies than as symptoms of broader system-wide problems.

This backdrop underscores the importance of credit selection, structure, and documentation, as dispersion continues to increase across the loan universe.

Technical Factors: Positive, but Worth Monitoring
Supply Discipline

• Opportunistic refinancing activity over the past several quarters has materially reduced near-term maturity pressure, limiting forced issuance and improving issuer flexibility.
• M&A-related supply has remained below expectations, constrained by valuation discipline, macro uncertainty, and a still-cautious sponsor community.
• More aggressive transactions increasingly find a home in private credit markets, helping preserve overall credit quality in the broadly syndicated loan market.

Demand Stability

• The loan investor base remains predominantly institutional and relatively “sticky,” anchored by insurers, pension funds, and structured vehicles.
• CLO formation continues to provide a steady bid for loans, even as issuance normalizes from exceptionally strong levels.
• Compared with other credit markets, retail participation remains limited, contributing to more stable demand during periods of volatility.

While technical factors can be volatile, the current balance of supply and demand remains constructive.

Valuations and Relative Value
Versus Equities

• Equity markets have delivered exceptional returns over recent years, leaving valuations at or near historic highs and increasing downside risk.
• For many investors, equities continue to represent the majority of portfolio risk, often near 60% of total assets.
• In 2025, loans yielded 8.06%¹ -- a level comparable to long-term stock market returns. Loans clearly have their own suitability and risk/reward considerations. But unlike stocks, their performance historically has not relied on earnings multiple expansion or continued risk-on sentiment.

Versus Fixed Income

• Recent bond returns have exceeded today’s starting yields, implying lower forward return potential amid lower-interest coupon payments.
• Duration risk remains a key vulnerability, particularly if long-term yields remain sticky or volatile.
• Loans currently offer higher income with minimal duration exposure, reducing dependence on favorable rate movements for total return.

Versus Alternatives

• Private credit has attracted significant capital, driven by its senior secured, floating-rate profile.
• Public loans share many of these characteristics while offering greater liquidity, transparency, and flexibility.
• For many investors, loans can function as a liquid complement to private credit, rather than a substitute.

Portfolio Role: Why Loans, Why Now
In today’s environment, the benefits loans can add to portfolios go beyond a simple credit allocation:

• They offer income that is contractually delivered and senior in the capital structure, providing a buffer against equity volatility.
• Their floating-rate nature makes them well suited to environments characterized by inflation persistence and rate uncertainty.
• They provide a public-market alternative to private credit, balancing income generation with liquidity and active risk management.

Despite these attributes, many investors remain under-allocated or unallocated to loans, reflecting legacy portfolio frameworks rather than current market realities.

Risks and Watchpoints

• A sharper-than-expected growth slowdown could pressure earnings and credit metrics.
• Inflation re-acceleration could constrain policy easing and increase volatility.
• Idiosyncratic credit events or structural complexity may drive even greater dispersion.
• Technical shifts could introduce periodic price volatility.

Conclusion
The liquid floating-rate loan market enters 2026 on solid footing. A supportive policy environment, resilient fundamentals, disciplined supply, and compelling relative value combine to create an attractive backdrop for carry-oriented credit strategies. While risks remain, loans offer a differentiated solution to many of today’s portfolio challenges: elevated equity valuations, uncertain bond returns, persistent inflation, and growing reliance on alternatives.

In our view, loans are not merely a tactical opportunity, but a strategic allocation well suited to a more complex and less forgiving market regime.

¹ As of November 30, 2025, based on the Morningstar LSTA Leveraged Loan Index. Past performance is no guarantee of future results.

^{RISK CONSIDERATIONS
Floating-Rate Loans: An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There can be no assurance that the liquidation of collateral securing an investment will satisfy the issuer’s obligation in the event of nonpayment or that collateral can be readily liquidated. The ability to realize the benefits of any collateral may be delayed or limited. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non– payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments. Borrowing to increase investments (leverage) will exaggerate the effect of any increase or decrease in the value of investments. Investments rated below investment grade (typically referred to as “junk”) are generally subject to greater price volatility and illiquidity than higher rated investments. As interest rates rise, the value of certain income investments is likely to decline. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical or other conditions. Changes in the value of investments entered for hedging purposes may not match those of the position being hedged.}

^{There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.}

^{A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required.}