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Clopremium > Blog > No Login Needed: Enhancing transparency in the CLO market > The Bottom-Up Approach to CLO Investing— a Gold Standard? 
No Login Needed: Enhancing transparency in the CLO market

The Bottom-Up Approach to CLO Investing— a Gold Standard? 

September 22, 2022
posted on Sep. 22, 2022 at 9:44 pmSeptember 23, 2022

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 Total Return Alpha (1Q 2020–3Q 2022)

(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

Disclaimers

The information, research, data, research-related opinions, observations, and estimates contained in this document have been compiled or arrived at by CLO Research Group, based upon sources believed to be reliable and accurate, and in good faith, but in each case without further investigation. None of CLO Research Group or its service providers; authorised personnel, or their directors make any expressed or implied presentation or warranty, nor do any of such persons accept any responsibility or liability as to the accuracy, timeliness, completeness, or correctness of such sources and the information, research, data, research related opinions, observations and estimates contained in this document. All information, research, data, research-related opinions, observations, and estimates in this document are in draft form as of the date of this document and remain subject to change and amendment without notice. Neither CLO Research Group nor any of their third-party providers shall be subject to any damages or liability for any errors, omissions, incompleteness, or incorrectness of this document. This article is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell securities and shall not be relied upon as a promise or representation regarding the historical or current position or performance of any of the deals or issues mentioned in it.

Tags:Bottom-Up
CLO ResearchSeptember 22, 2022
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