In the latest episode of “ETF 360,” VettaFi head of research Todd Rosenbluth spoke to Nick Childs, CFA, portfolio manager at Janus Henderson Investors. The two discussed the (JAAA ).
The CLO space has become increasingly exciting, and Childs noted that it has grown over the last few decades. “It is now over $1 trillion in size. You compare that to the high yield market of $1.2 trillion in size, it’s a real marketplace,” Childs said.
Prior to JAAA, investors didn’t have a lot of options allocating to the space, with Childs noting that banks, insurance companies, and sovereign wealth were the entities taking advantage of what CLOs have to offer. According to Childs, “Having access to this more institutional product, given its size and scale, makes a ton of sense for investors, particularly today.”
Size and Scale
Asked why JAAA has seen such success recently, Childs noted that the product certainly has advantages from being a first mover. However, he also sees another big driver, namely: “The Fed’s raising rates at a level we haven’t seen in 40 years.”
A no-duration AAA product with yields close to 7% is eye-catching in today’s high rate environment. “To me, compared to anything else through a risk-adjusted lens, it seems pretty attractive.”
Rosenbluth inquired about the biggest mistakes investors are currently making in the markets. Childs pointed to the certainty of total returns and outcomes as being totally dispersed. “When I think about investor portfolios really taking the income that the Fed is giving you given what they are doing from interest rates, finding things that are high-quality with the certainty in terms of outcome and total return makes a ton of sense, and you just don’t need to take that much risk to get that today,” Childs said.
High-quality fixed income is another potential solution, according to Childs. He also urged investors to think about what the Fed is doing and how that could inadvertently affect certain corners of the market. “Agency mortgages stick out incredibly well in that environment, given quantitative tightening.”
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