Janus Henderson, a prominent global asset management firm, is urging investors to focus on fixed-income sectors with cheaper relative valuations in 2025. This strategy comes as interest in diverse income-generating avenues intensifies amidst fluctuating market conditions. The firm highlights the strategic allocation in their Multi-Sector Income Fund, which, as of January 31, 2025, has approximately 13% of its assets in collateralized loan obligations (CLOs).
The Janus Henderson AAA CLO ETF (JAAA) currently offers a substantial 30-day SEC yield of 5.37% with a modest expense ratio of 0.2%. These figures underscore the firm’s commitment to providing competitive returns through carefully selected investments.
Spreads, which measure the yield difference between Treasurys and other fixed-income assets of the same maturity, are a critical factor in investment decisions. John Lloyd, a representative from Janus Henderson, notes that high yield is currently trading at the first percentile, indicating limited spread availability. This environment poses both challenges and opportunities for investors seeking to maximize returns.
"Over a year period, even if you do hit rough spots, it's much harder to get a negative return with those starting yields," – John Lloyd
Investors now have the opportunity to secure 120 basis point spreads on new issues, surpassing what might be achieved with investment-grade credit. Lloyd highlights that AAA-rated CLOs have a superior rating compared to the investment-grade index, which stands at BBB. This higher rating reflects the potential for more stable returns.
"You're getting almost double the spread for very similar volatility," – John Lloyd
Despite the attractive yields, investors must consider the tradeoff of convexity. At the start of the year, approximately 70% of loans traded above par, introducing the possibility of repricing. Lloyd explains this dynamic as a crucial consideration for investors navigating the loan market.
"The tradeoff there is convexity, because in the loan market, at the beginning of the year, you had a 70% of loans trading above par, and you can get repriced," – John Lloyd
The previous year saw bank loans achieving a total return of 8.75%, while high-yield investments returned 8.2%. Agency mortgage-backed securities (MBS) underwent significant changes due to the Federal Reserve's reduction in holdings and banks largely exiting the market. The Multi-Sector Income Fund strategically holds about 15% of its allocation in agency MBS, which have a notable 30-day SEC yield of 6.39% and a net expense ratio of 0.68%.
"You're picking up some really good carry versus corporates that we historically haven't had in the mortgage market," – John Lloyd
Lloyd emphasizes a preference for higher-rated securities within CLOs, particularly those rated AAA, AA, and A. This preference aligns with the firm's focus on maintaining quality and stability within its investment portfolio.