The diversification benefits of adding floating-rate CLOs to fixed income portfolios
Portfolio Managers John Kerschner, Nick Childs, and Jessica Shill discuss how adding floating-rate collateralized loan obligations (CLOs) to traditional fixed-rate bond portfolios may improve risk-adjusted returns.
1 minute read
- With the Bloomberg U.S. Aggregate Bond Index comprising 100% fixed-rate debt, investors seeking improved risk-adjusted returns might consider adding floating-rate CLOs to their bond allocations.
- Exhibiting ultra-low duration, attractive yields, strong credit ratings, and low combined correlation to equities and fixed income, the addition of CLOs may result in improved risk-adjusted returns.
- As the Federal Reserve readies itself for more potential rate hikes – and signals that it expects the federal funds rate to remain higher-for-longer – CLOs stand to benefit from a higher rate regime as their coupons continue to reset in lockstep with changes in short term rates.
The issue of diversification has roared back to the forefront of investor concerns in 2022, as equity and fixed income markets experienced unprecedented concurrent drawdowns. For many investors, fixed income is considered “the diversifier” to their equity holdings, but disappointingly, they have not seen much diversification benefit from bonds in 2022.
In response, some investors are looking to new asset classes to diversify their portfolios. Liquid alternatives, unlisted real estate, and cryptocurrencies have garnered more attention, and their inclusion in traditional stock-bond portfolios is on the rise. While we believe this form of inter-asset class diversification (diversification between asset classes) provides benefits when done well, we think investors should not overlook the importance of intra-asset class diversification (diversification within asset classes).