Some CLO investors have access to their own internal CLO management or loan platform, so technically speaking, they have access to lots of credit information and insight.
The bottom-up analysis allows investors to assess external CLO managers and their credit selection process. This analysis may help investors avoid new or seasoned managers with poorly constructed portfolios! It also gives CLO investors the chance to ask thoughtful and important questions about individual credits. That said, CLO investors may not have the same level of access to credit information as the external managers and there is a risk that a credit call could be made based on incomplete, stale information.
The bottom-up approach to CLO investing is presumably more helpful if one is always right — one’s internal credit call is better than others! Potentially, there may be an inherent conflict of interest or a biased, judgmental call when using one’s credit team.
Some more sophisticated CLO investors are able to go one step further by working out the average credit score of external CLO portfolios. Still, this approach may miss trading gains and losses not reflected in the portfolio, having the same issues as using WARF or loan prices, etc. Besides, it is quite impossible to credit score every credit using one’s internal credit ratings. A good active and ongoing credit coverage of 50-70% is quite impressive, but what about the other 30-50%?
Further, even if it is possible to credit score every credit (though unlikely), it may miss the fact that CLO managers can still do well with better or poorer credits depending on their trading strategy.
Moreover, getting a few credits right or wrong may not have a meaningful impact on the overall portfolio return performance.
In other words, what is really missing is that bottom-up analysis mentions nothing about the track record and investment return performance of their external managers. A CLO is a managed vehicle rather than a static hold-to-maturity vehicle.
Related (premium) articles:
(Featured) EU CLO Managers: Quarterly Relative Standing Based on MV Return Alpha (1Q 2020–3Q 2022)
(Featured) US CLO Managers: Quarterly Relative Standing Based on MV Return Alpha
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