An in-depth guide to investing in collateralized loan obligations (CLOs)

Collateralized Loan Obligations (CLOs) are a fast-growing and dynamic part of the fixed-income market that give investors a unique mix of yield, diversification, and active management. This CLO primer talks about the structure, benefits, and risks of CLO securities, how CLO equity has done, and how more investors can now get CLO funds and mutual funds.

Learning about CLO securities and how they work as investments

A CLO is a type of structured security that combines a variety of senior-secured corporate loans that are mostly not investment-grade. These loans are often called “leveraged loans.” These loans are usually first-lien, which means they are backed by the company’s assets and get paid back before any other unsecured debt in the event of bankruptcy. The CLO manager is in charge of the portfolio and buys and sells loans to get the best returns and keep risk low.

CLO Equity Performance and Risk Profile

Investors looking for higher returns in a low-interest-rate environment have been paying a lot of attention to CLO equity performance. Equity tranches, which take the first losses if the loans behind them default, can give you annual returns of 8% to 15%, depending on the market and the quality of the credit behind them. This higher return potential is appealing, but it also comes with more risk, such as credit, liquidity, and interest rate risk.

Putting money into CLO Funds, Mutual Funds, and Bonds

The global CLO market has grown to more than $1 trillion, thanks to strong demand from institutional investors, hedge funds, and more and more individual investors. CLO funds and mutual funds let investors buy these securities by pooling their money and Collateralized Loan Obligation investing tranches. This gives investors more options and professional management.

People like CLO bonds, especially those in senior tranches, because their floating-rate coupons protect them from changes in interest rates. CLO investments in the equity tranche, on the other hand, are attractive to people who want higher returns and are willing to take on more risk.

Final Thoughts

Investing in CLO funds is a great alternative to traditional fixed-income assets. It offers active management, a wide range of corporate credit exposure, and the chance to earn good returns. CLO funds, CLO mutual funds, and direct investments in CLO bonds and equity tranches are all ways for investors to get CLO securities. CLOs are an important part of many diversified investment portfolios because of their past performance and structural stability, but they are also complicated and risky, so you need to think carefully about them.