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News Investor’s Corner
‘We tend to stick with tier-one managers’
by Lisa Lee
Lisa Lee: In this environment, what areas do you like to invest in? What kind of managers?
Palak Pathak: I think the technical in CLOs has been so one-way, where we’ve had negative-to-very-low net issuance and a lot of demand. That has driven spreads tighter. What are the repercussions of that?
Number one is the reach for spread. We tend to stay defensive by sticking with tier-one managers, as you are not really getting paid to go to tier three. And we also go short duration, to the shorter refis that are out of reinvestment or have one-to-two years left of reinvestment. We feel safer putting our investments there versus full duration since right now, when spreads are at post-GFC tights, your downside is a lot higher than your upside.
We believe in mean reversion as an investment philosophy. Given we’re at low single-digit percentiles in terms of historical spreads, there’s likely one way to go.
LL: So you expect things to go wider in the next couple of months?
PP: It doesn’t have to be the next couple of months, but over time, we definitely will see that mean reversion, and spreads will normalise back to that.
We always ask managers what capabilities they have in regard to distressed investing
Palak Pathak
Senior portfolio manager
TCW
LL: LMEs have become such a hot topic. When you talk to managers, what kind of action do you want them to take?
PP: We always ask managers what capabilities they have in regard to distressed investing. Do they have analysts that are focused and have experience in distressed situations and in workouts? Do they have a team that works on that specifically? Do they have lawyers in-house?
This has become such a prominent thing, and CLO docs are even reflecting this type of behaviour. So we want to make sure that they have the capabilities, because it’s very hard to predict when it happens.
LL: What’s the most exciting thing you’re investing in?
PP: We believe CLO equity thrives in periods of uncertainty, which is the phase we’re entering. When you have tight, locked-in spreads on the debt, and you have this volatility that should occur in at least the next five years, which is the reinvestment period of a CLO, I think that’s ripe for some good returns.
