Analizando JAAA, el mayor ETF activo de CLOs AAA del mundo
| Por Elsa Martin | 0 Comentarios
The CLO market has grown so large that it now surpasses high yield in the US. Although this asset class has been around for decades, it still needs to be educated on how it can behave, as Janus Henderson expert John Kerschner, global head of securitization products and fund manager, has found.
Kerschner heads JAAA , the world’s largest AAA- rated active CLO ETF , with $25 billion in assets under management. The firm has launched a UCITS version , the Janus Henderson Tabula EUR AAA CLO UCITS (JCL0) , which currently manages $212 million, and an offshore dollar version with around $175 million in assets. «We’ve obviously proven that our model works in the US. We’re just starting out in Europe and the UK; it will take more time, and a lot of educational outreach is needed,» the expert summarizes.
Kerschner agrees to explain to Funds Society the workings behind JAAA and the keys to this strategy’s success among his clients.
Are CLOs liquid enough to be tradable in an ETF?
We were asked this a lot when we launched JAAA five and a half years ago. I think the skepticism stemmed from people not realizing how liquid CLOs are, particularly AAA CLOs. We felt confident launching JAAA because of our experience with AAA CLOs during COVID . I managed a 40-act fund called Multi-Sector Income , which basically functioned as a fixed -income best ideas fund . We invested in CLOs, and throughout the pandemic, even in times of greatest illiquidity and dislocation, we continued to trade AAA CLOs to enhance the fund’s liquidity . We didn’t know how long the lockdown might last. But if you can trade a product even in that kind of environment, then it’s very liquid.
The reason is that it’s not really a credit product . What you typically see is CLOs trading at par or , if spreads tighten, even slightly above par, but the call option coverage is very short, typically two years.
So, a lot of investors, especially institutional ones , don’t like buying CLOs when they’re trading above par, because they can’t really go much higher, but they can go lower. That’s negative convexity for the price. But during COVID, we saw a lot of uncertainty. But people were saying, «Okay, now I can go out and buy AAA CLOs at $97 or even $95 for a few days. I know AAA CLOs never default, and I get about 3% coupon income. If I can get 3% plus 5%, so 5% growth on $95 at par over the next year, that’s 8% for a AAA asset.» That sounds pretty good. So, what we’ve often seen is that whenever these distortions happen, new money comes in.
How do you integrate CLOs into an active ETF shell?
Creating and redeeming cash is very simple. Whoever the market maker is , they give us cash, we give them shares, we take that cash, and buy CLOs. Or vice versa: they want CLOs, we have to sell CLOs, raise the cash, and give it to them. Around 90%, maybe even more now, of our purchases and redemptions, both, are now in-kind .
After Liberation Day , many market operators had end clients who wanted to buy AAA CLOs and turned to buying JAAA shares because of its liquidity and because its cost of capital is lower, as it trades at a one-cent bid-ask spread.
That’s what a lot of people don’t understand. They think, «Well, you’re so big and you trade so much…» But in reality, we don’t do that much trading . All the transactions that happen are equity CLOs, between us and the market makers.
What behavior did JAAA display during the shock following Liberation Day?
I think for many, the narrative was that there would be a dislocation at a time when JAAA was already large and had a lot of retail investors, and that many would get scared and want to sell, and then Janus Henderson would have to sell CLOs in a hurry in a very dislocated market. But that didn’t happen. Yes, we had some redemptions .
But we’ve always told investors that during a typical dislocation phase, JAAA might drop 1%-2% and then should recover very quickly. And that’s exactly what happened. We literally had no investors tell us they weren’t happy with the ETF’s performance. The only dissatisfied customer is someone who doesn’t know what to expect from the product, and that’s why we spend a lot of time and effort educating our investors so they understand that.
Does this strategy have any capacity limits?
For our JAAA ETF, we promise to give our clients the performance of the index , although there are some levels where we can add some alpha . As we grow, adding alpha becomes more difficult, but we’re still capable of doing so. Currently, our tracking error is still relatively low, but that’s fine for us and our investors, too.
If we can offset our fee, which is 20 basis points, everyone is happy.
So, to answer your question, we think the ETF’s capacity can reach several hundred thousand. But will we get there? I doubt it. But if we literally had to go out and buy every new issue of CLOs available, we would still fulfill the promise we made to our clients.
What if a AAA CLO defaults? How could that affect the ETF?
We recently had a large default , First Brands . They’re a manufacturer of windshield wipers and other automotive parts. And we quickly did the math. JAAA has 400 different CLOs. Each CLO has between 300 and 400 different leveraged loans . Obviously, there’s some overlap. But we had an exposure of between 21 and 22 basis points to this default.
Now, a AAA CLO has a 35% credit enhancement . So, in reality, it would take 400 such defaults to affect AAA CLOs.
What is your take on the current consumer situation in the US?
CLOs are backed by corporate loans, and most corporate loans will also be correlated with the broader consumer. The overall economy is doing quite well: second-quarter GDP was just revised upward to 3.8%, and we think the third quarter will exceed 3%. But that doesn’t tell the whole story, because there is some pain among lower-income consumers in the U.S. It’s become harder to find jobs. There’s still some inflation in the system. Cars, especially used ones, have become more expensive. Gasoline has stabilized but is still relatively expensive. Food prices have risen, and rent and housing are still very, very expensive in the U.S.
There’s certainly an affordability issue in that regard.
It’s the high-end consumers who are doing very well: if you have a job and a stock portfolio, your portfolio has increased enormously since COVID. That consumer, which is 10% of US consumers, accounts for 50% of spending. It’s a K- shaped economy : high incomes are doing well, low incomes not so much. We’re very aware of this. We’ve reduced our exposure to everything that is most exposed to that low-income consumer. Whether it’s subprime credit cards, subprime autos, or any type of corporate debt with greater exposure to this segment.
