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As investors search for yield amid historically tight credit spreads, questions may arise about how they might improve the risk-return profile of a traditionally diversified portfolio. Fortunately for investors, access to an asset class characterised by higher yields and attractive risk-adjusted return potential is expanding beyond its institutional roots at an opportune time.
Collateralized loan obligations, or CLOs, generally offer higher yields than comparably rated corporate bonds, such as those in the Global Aggregate Index. While CLO tranches are designed to offer various levels of risk and return, the highest-quality CLO tranches are notable for their consistent ability to deliver attractive income with little risk.
“In a world of elevated rates and persistent uncertainty, AAA CLOs offer a rare combination of high-quality credit, floating-rate coupons, and structural resilience,” says PGIM’s Edwin Wilches. “For investors seeking to enhance yield with minimal credit risk, AAA CLOs offer a compelling alternative to traditional fixed income holdings.”
Wilches should know. He helps oversee PGIM’s $75 billion CLO platform as part of his responsibilities as co-head of PGIM’s $145 billion securitized products team.
Managers Make a Difference
The $1.4 trillion-plus CLO market is poised for growth as new publicly traded securities increase access. That means CLOs will be new to many investors, accentuating the importance of experience, resources and performance attributes when selecting managers. PGIM ranks among the world’s top 10 CLO managers and top 10 CLO issuers4.
Backed by extensive institutional experience, PGIM enjoys resources and relationships that position it to play a leading role in the expansion of an asset class known for complexity and wide performance dispersion among managers. “PGIM offers an edge in sourcing, structuring, and secondary market execution,” says Wilches. “We’re able to negotiate better terms, including wider spreads, stronger protections, and ESG criteria, to deliver structural resilience and high-quality income.”
The “Risk-Remote” AAA Opportunity
Senior secured loans represent the primary collateral in CLOs. The loans are pooled into a special purpose vehicle, which issues tranches of varying credit quality. Though carrying the lowest credit risk, the AAA tranche enjoys added protection from the CLO structure, which distributes payments from the underlying loan pool to the highest-quality tranches first. That means the AAA tranche is last in line in terms of absorbing losses.
There have been no defaults or capital losses in the AAA tranches over more than three decades of market history. Wilches describes high-quality CLOs as “very credit-risk remote.”
Enhanced Diversification
CLOs are backed by actively managed, diversified pools of senior secured loans, resulting in low correlations with traditional fixed-income sectors and equities. Offering uniquely robust cashflow, incorporating AAA CLOs can meaningfully improve portfolio risk-adjusted returns and overall quality.
PGIM hopes to introduce the CLO opportunity to more investors through the recent launch of the PGIM Global AAA CLO Fund, one of the first truly global funds of its kind. To Wilches, who considers AAA CLOs to be among “the most attractive and cheapest assets across global fixed income markets,” the timing couldn’t be better.
“With rate cuts on the horizon, investors are rethinking their cash allocation. Senior CLOs offer that rare combination of liquidity and resilience without sacrificing yield,” he explains.
Past performance is not a guarantee or a reliable indicator of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Sources:
1. Yield represented by yield-to-worst of Global AAA CLOs: 50% JPM US CLOIE AAA / 50% EURO CLOIE AAA (USD Equivalent); Global Agg: Bloomberg Global Aggregate Index USD; Treasuries: ICE BofAML US 3-Month Treasury Bill Index.
2. Since earliest common inception date of 30/12/2011. CLO: JPM CLOIE Index; AAA CLO: JPM CLOIE USD AAA Index; AA CLO: JPM CLOIE USD AA Index; Global Agg Bond Index: Bloomberg Global Aggregate Index USD Unhedged.
3. For illustrative purposes only. Represents the capital structure of a below-IG company. Source of defaults: Moody’s 1993 to 2024 10-yr cumulative defaults, as of June 2025. All indexes are unmanaged. An investment cannot be made directly in an index. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
4. Source: JPM CLOIE, as of 28 Feb 2025.
Risks
An investment in the Fund involves a high degree of risk, including the risk that the entire amount invested may be lost. The Fund is primarily designed to purchase certain investments, which will introduce significant risk to the Fund, including asset performance, price volatility, administrative risk and counterparty risk. No guarantee or representation is made that any Fund's investment program will be successful, or that such Fund's returns will exhibit low correlation with an investor's traditional securities portfolio.
Any investment in the Fund will be deemed to be a speculative investment and is not intended as a complete investment program. Investment in the Fund is suitable only for persons who can bear the economic risk of the loss of their investment and who meet the conditions set forth in the Waystone UCITS Platform (Lux) SICAV's Prospectus, Supplement and Key Investor Information Document (the "KIID") or Key Information Document (the "KID") (collectively the "Fund Documents"). There can be no assurances that the Fund will achieve its investment objective. Prospective and existing investors should carefully consider the risks involved in an investment in the Fund, including, but not limited to, those discussed in the Fund Documents. Prospective and existing investors should consult their own legal, tax and financial advisors about the risks of an investment in the Fund. Any such risk could have a material adverse effect on the Fund and its Shareholders. The return may increase or decrease as a result of currency fluctuations. The use of financial derivative instruments may result in increased gains or losses within the Fund. Where an investor's own currency is different from the currency of the Fund, the return on investment may be affected by fluctuations in the currency exchange rate. The NAV of the Fund is calculated on a daily basis and published on the Fund's website at the following address: www.pgimfunds.com.
Political Risk: The value of the Fund’s investments may be affected by uncertainties such as international policy developments, social instability and changes in government policies. This can result in more pronounced risks where conditions have a particular impact on one or more countries or regions.
CLO Risks: The Fund invests a substantial proportion of its assets in senior tranches of CLOs. However, there is no requirement that the Fund’s investments be made at the most senior level of notes issued by the relevant CLO vehicle. CLOs, like all debt securities, are subject to the risk of default of principal and interest. CLOs are subject to credit, interest rate, valuation, and prepayment and extension risks. It is possible the even senior CLO debt tranches could experience losses due to default, downgrades of ratings of the underlying collateral and the default of the lower tranches, market anticipation of defaults and investor aversion to CLOs as an asset class. Some of the loans in which an underlying CLO may invest and to which the Fund may indirectly be exposed may be “covenant-lite”, which means the loans or obligations contain fewer financial maintenance covenants than other loans or obligations (in some cases, none) and do not include terms which allow the lender to monitor the borrower’s performance and declare a default if certain criteria are breached. An investment by the Fund in a CLO holding loans may potentially hinder the ability to reprice credit risk associated with the CLO. As a result of this risk, the Fund’s exposure to losses may be increased, which could result in an adverse impact on the Fund’s net income and NAV.
Regulatory Risks: Adverse developments with respect to CLO managers, such as regulatory issues or other developments that may impact the ability and/or performance of the CLO manager, may adversely impact the performance of the CLO securities in which the Fund invests. Investors should be aware that the Investment Manager and the Fund will be subject to the Securitisation Regulation, which may be amended over time. The nature of such amendments and their impact on the Fund are unknown.
The Fund is a sub-fund of Waystone UCITS Platform (Lux) SICAV, a societe d’investissement a capital variable (SICAV) incorporated with limited liability in Luxembourg and authorised as an undertaking for collective investment in transferable securities (UCITS) in the form of an open-ended investment company with variable share capital and subject to the Luxembourg Law of 17 December 2010 relating to undertaking for collective investment, as amended. 4850766
For Important Information Related to Risks and Disclosure Please Visit UCITS Disclosure
References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.
The views expressed herein are those of PGIM investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.
Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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