3 Reasons We Are Focused on CLOsThe current market environment has many investors eager to review their portfolios. One area garnering much of the industry’s attention are CLOs (collateralized loan obligations).
To gain a better understanding of CLOs and how they’re used, my colleague Maria Bethel and I sat down with two members of the Kestra Financial Due Diligence team who are hyper-focused on these alternative investments: Karen Bean, VP of Wealth Management, and Taylor Sperin, Due Diligence Analyst.
Karen and Taylor provided three reasons we’re taking a closer look at CLOs right now:
- In one way or another, CLOs are in nearly every portfolio. CLOs hold diversified groupings of leveraged loans financing non-investment grade U.S. businesses. They’ve been hugely beneficial to investors for their ability to provide greater yield than other investments, such as high-yield bonds. CLOs were initially created in 1993 and are now estimated to be a $1.2 trillion-dollar market in the U.S.
- Downward market trends are revealing areas of potential risk. As CLOs have not gone through a full credit cycle, we are actively working to assess potential risks in order to help financial professionals weather the storm. When compared to other alternative investments, CLOs are still relatively new to the marketplace, so much of the impact from the downturn has yet to be seen.
- Now is an opportune time to re-assess risk exposure. Just because CLOs carry risk doesn’t mean all risk levels are the same. Typically, these are broken out into tranches with AAA-rated CLOs with the lowest default rate and on the lower end of the spectrum CCC-rated CLOs with an increasingly higher risk of default. As market volatility picked up in the first quarter, concerns have heightened over whether products with CLO exposure will generate the same returns investors have grown accustomed to.
Pro tip from Karen: Take a close look at mutual funds through Morningstar. They have transparency filters to tell you exactly what’s inside. If you have some Mutual Funds with high yields or distributions, you might be surprised by how much CLO exposure you actually have.
Want to Learn More?
Check out the How Do CLOs Work in Today's Market podcast!