PGIM's Edwin Wilches
Credit spreads remain tight despite deteriorating credit quality and ongoing economic uncertainty. As a result, investors receive little extra yield for risks related to corporate bonds. Where might investors find a more attractive balance of risk and reward?
"Right now, in my opinion, is a great time to look at the CLO market," says PGIM's Edwin Wilches.
Wilches co-leads PGIM's $138 billion securitised products team. With deep experience in the market for collateralized loan obligations, or CLOs, he now enjoys a front-row seat as the asset class expands beyond its institutional roots thanks to new products. Having recently launched the PGIM Global AAA CLO Fund, one of the first truly global funds of its kind, PGIM occupies a spot on the leading edge of the trend.
More investors are now considering CLOs as part of their fixed income allocations. While approaches vary by risk appetite, there is a notable advantage in their ability to carry highly rated assets while benefitting from diversification.
Wilches uses the example of a CLO with AAA-rated debt. Though carrying the least amount of risk, the AAA tranche enjoys added protection from the CLO structure, which distributes payments from the underlying loan pool to the highest quality tranches first as part of a top-down "waterfall" hierarchy.
"CLOs typically offer higher yields than comparably rated corporate bonds," explains Wilches. Adding to the allure, the highest-quality CLOs present little risk. In more than three decades of CLO market history, there have been no reported defaults in the AAA and AA tranches.
PGIM's new fund builds on the firm's existing $77 billion CLO platform, leveraging decades-long relationships and extensive teams of experts. Wilches believes it is coming to market at an opportune time for investors, many of whom are eager to offset uncertainty with solutions to help boost income, reduce risk and enhance diversification.
"What gets us most excited about this fund is the ability to provide clients opportunities they haven't been able to access in the past," says Wilches.
Read why now is an opportune time for CLOs in our Focus guide with PGIM.
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