Ask the Manager: CLOs, Securitised Credit and Portfolio Diversification in a Volatile Market

Securitised credit has attracted renewed attention as investors navigate persistent rate uncertainty, geopolitical risks, and evolving credit markets. While collateralised loan obligations (CLOs) were once viewed as a specialist allocation, improving market understanding and broader access are bringing the asset class into mainstream fixed income discussions.

In this edition of Ask the Manager, John Kerschner, Global Head of Securitised Products, and Ian Bettney, Portfolio Manager at Janus Henderson Investors, discuss how securitised markets have navigated recent volatility, the role of CLOs within diversified portfolios, and what investors should consider when evaluating the asset class today.

How have securitised markets, particularly CLOs, responded to recent market volatility?

John Kerschner:
Despite geopolitical headlines and sector-specific concerns such as volatility in software-related credits, securitised products have held up relatively well. Markets experienced some spread widening, which was expected given the news flow, but overall volatility has remained limited.

One reason is diversification. A typical CLO contains exposure to roughly 200–300 underlying loans, and CLO ETFs hold exposure across many CLOs. That diversification means sector-specific weakness has had only a modest impact on the broader market. Investors entered the year with strong technical conditions, and although issuance slowed somewhat during periods of uncertainty, the market has remained stable overall.

Ian Bettney:
Even in areas like software, where investors were concerned about credit exposure, the actual concentration within CLO portfolios is relatively small. Only a limited portion of the loan universe sits in the segments that markets were most worried about, and managers have generally demonstrated clear investment frameworks around risk management.

How has securitised credit performed relative to traditional fixed income?

Kerschner:
Securitised credit has performed well, particularly for investors seeking exposure at the shorter end of the yield curve without taking significant duration risk. Many securitised assets sit relatively high in the capital structure and typically have shorter maturities.

In an environment where duration exposure has hurt portfolios, these characteristics have helped securitised strategies stand out. Interestingly, many investors expect securitised products to be more volatile, but in recent market conditions they have actually shown less volatility than broader fixed income segments.

Bettney:
Floating-rate structures have also been important. CLOs and many securitised assets reset with interest rates, which has reduced drawdowns linked to rate moves. In a world where rate volatility remains elevated, that feature has been a meaningful benefit for portfolio construction.

What are you seeing in terms of fundamentals across underlying collateral markets?

Bettney:
Across European and UK markets, much of the consumer stress experienced during 2022 and 2023 has now worked its way through the system. Originators tightened lending standards, and newer collateral pools generally show improved quality.

Within CLOs, some increase in lower-rated exposures has reflected pressure from higher borrowing costs, but these levels remain within expected ranges. Importantly, structural protections remain substantial, particularly for senior tranches, where credit enhancement provides significant buffers.

Kerschner:
Market repricing has also been orderly. While leveraged loan prices have moved at times, CLO spreads have adjusted gradually rather than through sharp dislocations, which is easier for investors to manage from a portfolio perspective.

What factors are currently supporting demand for securitised credit and CLOs?

Kerschner:
Flows into fixed income have been steadily increasing, partly because yields are more attractive relative to the past decade and equity markets appear less certain. These inflows support technical conditions across securitised markets.

Insurance companies are another important source of demand. Traditionally focused on investment-grade corporates, many insurers are now looking to securitised products to capture additional spread while maintaining strong credit quality.

Bettney:
In Europe specifically, regulatory developments are also important. Proposed reforms to Solvency II are reducing capital charges for certain securitised assets, including CLOs, making them more accessible for insurers that were previously constrained by capital costs. This has led to growing interest from institutional investors evaluating how to incorporate the asset class.

From a valuation perspective, where do you currently see opportunities?

Kerschner:
CLOs remain attractive because spreads are tighter than a year ago but still far from historical extremes. For senior AAA CLO tranches, current spread levels offer appealing compensation for high-quality floating-rate exposure.

Structurally, CLOs also benefit from relatively limited call-option risk at current spread levels, which improves expected returns compared with periods when spreads were significantly wider. Overall, we continue to view CLOs as a strong diversifier within fixed income portfolios.

What risks should investors be monitoring over the next 12 months?

Kerschner:
Macroeconomic risks, particularly concerns about recession, remain the primary consideration. Securitised products are ultimately linked to consumer and economic activity, so a meaningful downturn could lead to wider spreads.

That said, recession forecasts have frequently proven inaccurate in recent years, and the global economy has shown resilience. Historically, securitised markets have tended to widen during stress periods but have also demonstrated durability over time.

Bettney:
Another risk is idiosyncratic exposure within certain securitised sectors. Areas such as commercial real estate or data centres require detailed underwriting, as outcomes can vary significantly between individual assets. Active analysis and security selection remain critical.

How should investors think about securitised credit within a broader portfolio today?

Kerschner:
Securitised credit can serve multiple purposes simultaneously. It can provide income, diversification, and defensive characteristics depending on how it is used within a portfolio.

Bettney:
I would agree with that. It can function as an income generator, a diversifier, and a stabilising allocation within fixed income, particularly in environments characterised by rate volatility and shifting macro expectations.

ETFs have become an increasingly common way to access securitised credit. How should investors think about using ETF vehicles when allocating to CLOs?

John Kerschner:
One of the challenges historically with CLO investing was access. The market was largely institutional and required specialised mandates or significant operational resources. What exchange-traded vehicles allow investors to do is access diversified CLO exposure in a much more efficient format.

From an investment perspective, the diversification benefit remains the same, but the implementation becomes simpler. Investors can gain exposure quickly and adjust allocations as market conditions change, rather than needing to build positions through individual securities.

Ian Bettney:
The liquidity and transparency characteristics are also important. Investors can see pricing continuously and manage exposures more dynamically, which fits well with how portfolios are increasingly constructed today. The ETF structure essentially removes some of the operational barriers while maintaining exposure to the underlying securitised market.

Marketing communication. For professional investors only. Capital at risk.

This interview is part of an advertising partnership between Janus Henderson Investors and Trackinsight.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.