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Talking Shop: Investing in Collateralized Loan Obligations

By July 15, 2021No Comments

Member question: “Have any members considered/evaluated adding [collateralized loan obligations] to their investment portfolio in the current environment?

  • “While we’ve had CLOs in the portfolio in the past, it’s something that hasn’t been actively pursued in recent years and we are dusting it off for evaluation.”

Peer answer 1: “We have been investing in CLOs since Q2, almost exclusively in the AAA space, but we have authorization to do AA. Spreads are tight, but they are a good option to park cash and pick up some yield without taking any more duration or mortgage risk.”

Peer answer 2: “We started investing in CLOs at the end of 2020 for similar reasons to those [Peer 1] mentioned: taking on less duration and mortgage risk. We have authorization to invest down to the single-A level but typically try to reduce risk weighed assets so we only go that low if the spreads/credit look good and risk weights aren’t too high.

  • “Much if not all of the AA bonds we purchased are 20% risk-weighted. CLOs make up about 12% of our portfolio now.”

Peer answer 3: “We like CLOs for all of the reasons mentioned above. I leveraged this asset in a prior life and it performed very well in a similar rate environment. With that said, [there are] definitely some hurdles to get folks comfortable with this asset class, but it’s on our radar.”

Peer answer 4: “We are looking at CLOs now and will take it to the investment committee for evaluation.”

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Justin Jones

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