Beyond Traditional Income: The Case for CLOs and Opportunities within the Securitized Universe

Video transcript

1. Why is Janus Henderson particularly focused on securitized assets compared to other fixed income securities?

Investors can reasonably expect that the economic activity will eventually slow down, particularly now that we start to feel the bite from the Fed's monetary policy being felt through the broader economy. That being said, so far this year, what we've seen in the world of traditional fixed income, and particularly if you look at corporate bonds, whether investment grade or high yield, they have been trading really tight relative to their long-term averages, which means that although they look attractive on paper, they might not offer a lot of spread and therefore not a lot of buffer should anything go a bit differently than the current base case that the market has for soft lending. Obviously, there are some technical factors that explain part of that behaviour, specifically the fact that a lot of companies have front-loaded their investment needs by raising a lot of depth in 2021 when rates were extremely low. But that being said, conversely, the world of securitized is offering much more attractive spreads relative to the long-term averages, and therefore there is much more buffer in case anything was to deviate from this central case. If we take the example of AAA-rated CLOs, these are today offering a yield-to-worth of 7.3% with zero duration, and that's about 50 basis points higher than what you would get from investment-grade corporate bonds. And again, here we're talking about AAA-rated assets. So while we recognize that securitized assets, securitized credit might sometimes sound a bit scary and definitely wins the trophy for most acronyms in a sector, they, today, are where we see most of the opportunities. We believe that asset managers with the right capabilities will be able to capitalise on that. We believe at Janus Henderson that we have one of the best, if not the best securitized team in the industry, and therefore we've been focusing a lot of our attention and efforts in that space.

2. Janus Henderson's AAA CLO ETF has garnered significant interest and attracted considerable flows. Why should investors in Asia find this strategy appealing?

Our AAA-rated CLO ETF was launched about three years ago, and is on track to attract about USD 5 billion in AUM by the end of this year. We believe the success of this strategy is threefold. The first one is really the democratisation of the access to the asset class. We have to keep in mind that CLOs are not new, but they're new to the broader investing public. In the past, only institutional investors were able to tap into that market, and the reason is simple. You needed about a quarter million dollar to be able to just get a small ticket within that space. Nowadays, thanks to the creation of the ETF, anybody can, with a few hundred dollars, go and add that asset class in their portfolio. The second reason is obviously the attractive income it generates. Today, particularly in 2023, investors have been left scrambling trying to balance a barbell between duration and yield, which was very difficult. On the one hand side, investors were allocating a lot to cash and money market. On the other hand, they understood the importance of trying to increase and lean into duration, but the volatility in rate markets made it very difficult. So the focus was, therefore, how can we optimize our allocation in cash and money market and try to get better and more than what just the fed rates are? That's exactly what AAA-rated CLOs deliver. What they give you is basically 170 basis points above what cash would give you for something that has literally close to zero duration as CLOs are floating rate instruments. And finally, something that is oftentimes misunderstood is how well-behaved CLOs are. Generally, AAA-rated CLOs are among the most well-behaved spread products out there. What we mean by that is that if you look at 2022, it was a terrible year for fixed income, most fixed income assets ended up the year down double digits. Well, AAA-rated CLOs actually returned 1% positive performance, which is really unheard of. Similarly, it's important to keep in mind that those assets tend to be trading at relatively low volatility. 84% of daily returns for CLOs are comprised between zero and three basis points, which is miles away from the volatility we saw in rate products so far this year. Finally, that leads us to the natural conclusion, which is those assets offer a lot of diversification compared to all traditional fixed-income assets. If we look at correlations between AAA-rated CLOs and treasuries, for example, or the US aggregated index, you're basically with a correlation of close to zero. So in that alone, it creates a lot of diversification, which is attractive for any investor who is trying to build a more resilient fixed-income allocation.

3. Apart from CLOs, what other significant opportunities has Janus Henderson identified in the realm of securitized assets?

Today, there are a couple of themes that we think are very important for investors to have in mind. We talked earlier about the barbell between duration and yields, and we think within the world of securitized, you can actually tap into this theme in a very elegant way. On the one hand side, obviously AAA-rated CLOs give you yield. On the other hand, we see that agency MBS offer tremendous opportunity, and we, through our agency, MBS ETF, offer an easy access to this asset class, so that investors, whether they're trying to increase their yields or increase their duration, they have the building blocks to do so. Even more, we're continuing to develop our platform, and we actually launched last week our securitized income ETF, which is basically a best-idea portfolio of everything that we see within the world of securitized assets that we deem attractive for creating income and diversification for investors. So basically, giving the investors the opportunity, with just one trade, to get a diversified basket of agency MBS, CMBS, ABS, and CLOs, all in one trade, representing the best ideas of the team. And finally, we think that we are in a very unique position. Today, we have a very strong team in the world of securitized, and we have a platform that we're continuing to expand that gives the investors the opportunity to access it, whether they are using mutual funds, which is the case of many clients, or whether they want to do the allocation even more themselves through the building blocks that ETFs provides.