The income advantage: How Collateralized Loan Obligations (CLOs) can provide better yield without sacrificing quality
[Inspiring music]
[CIBC logo]
[CIBC Asset Management]
[The income advantage: How Collateralized Loan Obligations (CLOs) can provide better yield without sacrificing quality]
[Aaron Young, Executive Director & Head, Client Portfolio Management]
[Aaron Young, a man in a business suit sitting in an office meeting room, addresses the camera.]
>> Aaron Young: The reason we believe high-quality CLOs are an exciting tool in the toolkit for investors is the nature of these investments.
High-quality CLOSs are simply combined portfolios of loans made to some of the largest and midsized companies in the United States.
[Size of CLO market compared to more familiar bond markets ($billions). A graphic compares the size of the CLO market compared to other bond markets, with each market represented by a rectangle. Larger-sized rectangles occupy more of the market.
Text inside each rectangle denotes the market name and size in billions of dollars. From largest to smallest: US High Yield ($2.005 trillion), CLOs ($1.172 trillion), Canadian Federal ($898 billion), Provincials ($763 billion), Canadian Corporates ($594 billion).
Source: JP Morgan, Bloomberg. Based on market value, Canadian dollar equivalents. As of February 2025.]
CLOs represent a $1.2 trillion market bigger than Canadian government bonds, provincial bonds, and even Canadian corporate bonds.
CLOs are offered across the quality spectrum but the majority of the market is AAA-rated securities which represents about 60% of the entire CLO universe.
[CLO market by credit quality. A graphic shows the CLO market divided by credit quality, with each credit quality represented by a rectangle. Larger-sized rectangles occupy more of the market. Text accompanying each rectangle denotes the credit quality and the percentage of the market it occupies. From top to bottom: AAA (61%), AA (12%), A (6%), BBB (7%), BB-B (5%), Equity (9%). Source: JPMorgan Based on market values - As of February 2025]
Their quality is borne out in the level of defaults CLOs have experience over many business cycles.
[Business cycles and investments (1994-2024). Growth of a $100,000 investment from 1994 to 2024 (average annual return of 8.05%). A line chart measures dollar value ($0 – $1,100,000) on the y-axis and year (1994-2023) on the x-axis. Over the course of time, a line animates consistently upward from $0 in 1994 to just over $1,000,000 in 2024, with several sharp declines along the upward path. Text boxes appear at some of the declines: “Global Financial Crisis” around 2008; “Sovereign Bond Crisis” around 2010; “Oil Price Decline” around 2015; “Covid-19” around 2020. Data Source: †Morningstar Direct September 2024. S&P/TSX Composite Index.]
Through the great financial crisis, the European sovereign debt crisis, the energy crisis of 2014, and the Covid-19 pandemic. Through all these cycles, AAA-rated CLOs have exhibited 0% defaults and fared much better than public corporate bonds held by most investors within their total portfolios.
[Default rates: CLOs vs traditional corporate bonds. % Default rate. A chart compares the default rates of corporate bonds vs. CLOs. AAA CLOs have a 0% default rate against 0.8% for Corporate Bonds. Across AAA, AA, A, BBB, and BB, default rates of corporate bonds are higher than CLOs. An arrow animates on the chart along with text reading “CIBC Asset Management’s area of focus”, showing that the area of focus includes AAA, AA and A. Source: Standard & Poor’s. Based on 10 year cumulative default rates. CLO timeframe = 1997-2023 / Corporate Bond timeframe = 1981-2023. As of December 2024.]
So although this asset class sounds exotic, it's actually had less bumps in the road than more traditional fixed income investments. With higher quality and a focus on income generation, the highest rated CLOs actually offer investors significant additional yield above more traditional asset classes.
[Better yield without sacrificing quality. Yield to worst (%). A bar chart shows the percentage yield for 3-year term bonds. CLO AAA, CLO AA and CLO A have yield of 4.2%, 4.6% and 5.0%, higher than federal (2.9%), GIC (3.0%), Credit AA (3.7%), Credit A (4.0%) and Credit BBB (4.0%). Source: JPMorgan, ICE BofA, Bank of Canada, Evolve ETFs Based on CAD-equivalent yields. As of January 2025.]
[CIBC Income Advantage Funds]
So how do investors take advantage of this opportunity? We've launched the CIBC Income Advantage Funds in response.
[CIBC Income Advantage Funds. Text for three funds appear onscreen: “CIBC Income Advantage Fund”, “CIBC U.S. Dollar Income Advantage Fund” and “CIBC Income Advantage Fund - ETF Series | CCLO”. A donut chart titled “Portfolio composition” appears beside the fund names, and indicates that the funds will be 80%-100% AAA CLOs and 0%-20% AA and A CLOs. As at April 2025.]
These funds focus on providing access to an asset class not previously available to individual investors.
[What types of CLOs are added to a portfolio?]
[Sandor Polgar, Portfolio Manager, Fixed Income, CIBC Asset Management]
[Sandor Polgar, a man in a business suit sitting in an office meeting room, addresses the camera.]
>> Sandro Polgar: One of the benefits of CLOs is the wide breadth of underlying collateral that makes up the collateralized loan obligation. What we like to see is a large breadth of industries represented in the actual exposure.
So that could be anything from healthcare telecom, aerospace, industrial consumers.
[Doctors in an operating room working on a patient. A telecoms satellite dish. A jet being built in a warehouse. A transport ship full of shipping containers.]
What we want to see is no individual risk, but a wide breadth of exposures, which is one of the best benefits of the collateralized loan obligation.
[Working together: Portfolio Management and Credit Research teams]
The credit team and portfolio management team’s work is really intertwined in the entire process of the CLO investment. The credit management team is integral when we look at things like the composition of the collateral pool and its performance, whether or not that collateral pool will meet the cash flow demands of every tranche within the CLO investment.
[The CIBC logo. Various shots of Sandor and three other business-people meeting in an office.]
We work hand in hand when we look at CLO managers and whether or not they fit the criteria for them to be tier 1 managers. And they also work very closely with us in the due diligence of the documentation process.
[How do the CIBC Income Advantage Funds fit in a portfolio?]
>> Aaron Young: The CIBC Income Advantage Funds fit within a portfolio follows what we call “the large institution playbook”.
[AAA CLO market participants. Dominated by banks and insurance companies. A graphic shows the CLO market divided by its participants, with each participant represented by a rectangle. Larger-sized rectangles occupy more of the market. Text accompanying each rectangle denotes the participant and the percentage of the market it occupies. From top to bottom: Banks (38%), Insurance (26%), Pension Funds (11%), Asset Managers (19%), Non-financial (5%). Source: US Treasury Department. Due to rounding, amounts presented herein may not add up precisely to the total. As of June 2020.]
AAA-rated CLOs are mostly held by some of the largest banks, insurance companies and pension funds across the globe. The funds offer enhanced yield and diversification within a fixed income portfolio, making them attractive to investors with a lower risk tolerance compared to a traditional high-yield investor.
[To learn more, connect with your advisor or CIBC Asset Management representative]
[Renaissanceinvestments.ca/CLO]
[The views expressed in this material are the views of CIBC Asset Management Inc., as of 04/29/25 unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions.
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CIBC Income Advantage Fund and CIBC U.S. Dollar Income Advantage Fund, (the Funds) invest primarily in a diversified portfolio of U.S. floating-rate collateralized loan obligations (CLOs) rated AAA. The Funds intend to invest at least 80% of their assets in AAA rated CLOs (at the time of purchase) but may also invest in CLO AA and/or A rated CLO tranches (at the time of purchase). This rating does not constitute a guarantee, may be downgraded, and in stressed market environments, it is possible that even senior CLO tranches could experience losses due to actual defaults, increased sensitivity to defaults due to collateral default, and the disappearance of the subordinated/equity tranches, market anticipation of defaults, as well as negative market sentiment with respect to CLO securities as an asset class.
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