Baillie Gifford multi-asset managers bet on CLOs as rates rise

The Edinburgh-based asset manager holds the Plutus CLO fund in three of its multi-asset strategies.

Citywire .- CLOs are floating-rate fixed income products that pool together corporate loans into a single debt security and are issued by financial institutions. Issuance has grown exponentially over the past decade due to the higher returns CLOs offer relative to other fixed income products.

However, concerns have been raised about the structural similarities between CLOs and collateralised debt obligations, a leading cause of the 2008 credit crisis, when millions of homeowners defaulted on their mortgages.

Collateralised loan obligations (CLOs) may carry a certain stigma but the asset class is a ‘useful’ risk-and-return diversifier in multi-asset portfolios in the face of rising interest rates, according to Baillie Gifford multi-asset manager Scott Lothian.

Several of Baillie Gifford’s multi-asset strategies invest in CLOs via the Plutus CLO fund, domiciled in Ireland. The fund is managed by London-based Prytania Asset Management, a specialist in securitised debt investments.

The fund was added to Baillie Gifford’s multi-asset portfolios in September 2020 and is a top 10 holding in three strategies: the Baillie Gifford Multi Asset Growth fund, the Sustainable Multi Asset fund and the Diversified Growth fund. The £171.9m Sustainable Multi Asset fund has the largest position, allocating 3.9% to the fund (see table below).

A spokesperson for the Edinburgh-based asset manager told Citywire New Model Adviser it had held the fund in its multi-asset portfolios since September 2020.

Lothian said CLOs were not as sensitive to changes in interest rates as many bond holdings are because they use a floating rate as opposed to the fixed rate used by many issuers. This makes them a ‘useful diversifier’ for the multi-asset strategies since they are likely to be less impacted by rising rates.

‘It all comes back down to the desire to have a broad opportunity set so that you have different risk drivers, different return drivers coming into the portfolio,’ he said.

‘Because they’re floating rate, because the underlying credit is a little bit different from what you may get from regular credit markets, it helps to diversify. We want to be spreading our bets.’

Lothian also noted that CLOs have withstood recent market turmoil because they tend to be less liquid than other assets, making them less likely to be sold off immediately.

‘CLOs [have been] relatively more resilient through recent market drawdowns, perhaps because they’re less liquid.’

Such a position comes with the risk of being unable to exit if something goes wrong. Asked about the underlying quality of the Plutus CLO fund’s credit, Lothian said it was ‘something we’re keeping an eye on’ and the fund was ‘at the vanilla end’ of the CLO market.

Source: Blackbourne, N. (2022), ‘Baillie Gifford multi-asset managers bet on CLOs as rate rise’, Citiwire, 10 November. Available at https://citywire.com/new-model-adviser/news/baillie-gifford-multi-asset-managers-bet-on-clos-as-rates-rise/a2401593?re=102740&refea=1448215