The CLO industry can be a little clubby… it feels like there are few advocates

It is important to be communicative internally with all stakeholders, so one of the first things I did when I joined PensionDanmark was a primer on CLOs. It’s transparent and helps investors and decision-makers understand the market. A good dialogue across front, middle and back-office as well as legal also helps.

The US market is much larger and hence offers the ability to diversify a portfolio. There is greater portfolio overlap in Europe, but par subordinations are higher at each point in the capital structure. We need to fully hedge FX risk and the cross currency basis is close to zero, having been 20-40bp. Because of this, we have been looking more at US CLOs, but the opportunity is a bit better in Europe where we have the benefit of Euribor floors.

We tend to focus on CLO managers that run somewhat conservative or liquid strategies.

I am an avid reader and podcast listener of anything on financial markets. Anything from Howard Marks specifically is very insightful.

Buying CLO triple A-rated paper in March and April last year was great. We sold a part of that earlier this year, realising returns above 10%, which is great, given the underlying credit risk. Cash is king and when volatility hits, investors tend to sell the most liquid assets and that meant elevated sales of senior CLO paper, which meant great opportunities.

I wish I was more active following the volatility and price drops in March last year. Triple A CLOs were a no-brainer, but there were opportunities lower down the capital structure, with double Bs trading at 40 cents on the euro.

ESG is evolving rapidly at the moment and this is exciting to follow. I think that securitisations, including CLOs, can contribute to sustainable finance going forward.

Europe is not filled with oil and gas credits, so the E in ESG doesn’t pose as much of a risk as it does in the US. But there are signs US CLO managers are getting on board with ESG. We send out a questionnaire to managers and use their responses as part of our risk assessment analysis.

Listed equities are trading near or at all-time highs, while spreads are at historically tight levels. It will probably be a slow grind tighter for CLOs, but it is important not to be complacent.

As a credit investor you are always worried about what could go wrong (my wife gets annoyed at that). But as a long-term investor, it is important not to be complacent when the going is good and liquidity is ample. On the flip side, you have to be less terrified when markets blow out.

Some investors will splurge their allocations immediately, rather than patiently allocating. I can call capital whenever spreads are interesting. In Q2 for instance, we only bought a smaller piece in one CLO triple A in Europe, but now these are north of 100bp we’re looking again.