:1440by571?wid=1440&hei=571&qlt=90&bfc=on&ts=1759247563914)
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.
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.
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.
4950012
