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News
Rapidly growing Janus Henderson CLO triple A ETF dominates market
by Tom Davidson
The dramatic growth of a new type of CLO investor is helping to narrow spreads, and has the potential to change many dynamics in the CLO market. That investor class is, of course, the CLO ETF, and especially the most common CLO triple A ETFs.
According to data from Barclays Research, there are now eight CLO triple A ETFs, along with two mezz-focused ETFs. Their combined portfolios amount to USD 10.6bn of CLO paper, as of 3 May 2024. While that’s not quite on the scale of the largest bank investors, it is a sizeable portion of the market, and it is growing fast.
Inflows are picking up, not slowing down
John Kerschner
Head of US securitised products
Janus Henderson
Total CLO ETF AUM increased by USD 3.4bn so far this year, helped by four new CLO ETFs that launched in 2023. More are on their way this year.
At the LSTA/DealCatalyst 2024 CLO Industry Conference, Gretchen Lam, CEO of Octagon, said: “By our estimates, CLO ETFs are already a top-10 holder of CLOs, and within a few years could be in the top five. That’s good for the market, but in the longer term there are implications around how these flows could create volatility for triple As.”
That prediction might seem outlandish, but the growth of the market is surprising portfolio managers. As often happens in the ETF space, one has become dominant for retail investors: in this case, JAAA, the triple-A CLO ETF managed by Janus Henderson. As of 3 May, JAAA had reached USD 8.8bn in size, some 83% of the total market.
John Kerschner, head of US securitised products & portfolio manager at Janus Henderson says: “A year ago, JAAA was about USD 2.5bn in size, now we’re almost nine billion. And the inflows are picking up, not slowing down.”
* As of 3 May 2024; †HSRT transitioned to CLO strategy in February 2024
Sources: Barclays Research & Bloomberg
The scale of inflows into JAAA, which have been as high as a billion dollars a month, would once have caused some issues with deployment. But according to Kerschner the CLO market is able to keep pace. “People always ask me if we’re growing too fast, but the CLO market is huge. Even at our new scale we’re a small part of the investor landscape, and we haven’t had any problem finding the assets we need.”
Despite its growth, JAAA is sticking to its investment thesis, and remains overweighted to tier one managers. It also runs with a low cash balance (currently around 1% of the portfolio), a vote of confidence in the liquidity of CLO triple-A paper.
One thing that has changed this year is a shift from the secondary market into primary. “We’ve now reached a scale where we can start making USD 100m anchor investments in the primary market,” says Kerschner. “We’re around 10-20% invested in primary, and I see that growing from here.”
While CLO ETFs can be an attractive investment vehicle for small institutional investors, JAAA is retail focused. The firm estimates that 90% of its investors are retail, although that includes some retail-focused allocators.
