Unfairly tainted CLOs offer safe and steady returns

This article is part of
Hunt for Income - March 2015

US retail investors are much more aware of the opportunity for potentially attractive returns in the leveraged loan market. Up until June 2014, US funds that invest in leveraged loans had experienced 95 consecutive weeks of inflows.

Retail investors in the US have poured billions of dollars into mutual funds and ETFs that invest in these loans. Recently these inflows have reversed as the threat of rising interest rates failed to materialise.

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However, demand from CLOs, which enjoy longer term funding and limited mark-to-market constraints, picked up the slack and volatility in pricing was limited.

The average UK retail investor is still relatively uninitiated about the potential returns available through investing in the leveraged loan market, either directly or through CLOs. The new funds listed in the UK market have also avoided some of the excesses seen in the US.

As the possibility of rising interest rates slowly creeps closer, this is surely an investment opportunity that should be more widely considered – especially if one is able to access the potential for uncorrelated double-digit returns.

Miguel Ramos Fuentenebro is partner of Fair Oaks Capital, investment adviser to Fair Oaks Income fund


CLO 2.0

The next generation of CLO transactions issued since the market restarted in the US and Europe


The year the CLO market restarted in the US (start of CLO 2.0)


The year the CLO market restarted in Europe (start of CLO 2.0)


Volume of US market CLO 2.0 issuance in 2014


Volume of European CLO 2.0 issuance in 2014


Forecast range of CLO issuance in the US for 2015


Forecast range of CLO issuance in Europe for 2015

Source: S&P Capital IQ LCD