Reckoner CEO: Active CLO ETFs can limit investor risk

Reckoner Capital CEO John Kim told a webcast that actively managed collateralized loan obligation ETFs can help address changes in the risk and return profile of CLO loan pools that passive ETFs may not spot. He said hands-on portfolio work can identify shifting collateral quality and liquidity constraints over a deal’s life.

Kim described CLO portfolios as complex and requiring specialist analysis. CLOs are backed by pools of corporate bank loans that can change over time as issuers repay, default or refinance. He said each CLO deal and manager follows different sourcing and trading practices, and those differences affect liquidity and downside exposure for investors.

“To analyze a CLO bond directly is a little bit difficult because there’s a lot of inputs that go into the modeling,” Kim said, adding that portfolio styles vary across managers and some pursue yield more aggressively while others are more conservative. He said active teams can avoid issuers with capital constraints and adjust holdings to seek better risk-adjusted returns.

Reckoner has packaged its CLO trading and analysis into exchange-traded funds aimed at retail and wealth channels, including a fund focused on AAA-rated tranches and a fund focused on lower-rated tranches. Kim described those ETFs as an expression of the firm’s trading activity rather than separate businesses.

Active managers, Kim said, can review tranche-level features and the composition of underlying loan pools on a near-real-time basis, look for valuation gaps and shift holdings to reduce exposure to stressed loans. He argued that index-based products replicate holdings without the same level of tranche or loan-level scrutiny.

Collateralized loan obligations issue multiple debt and equity tranches backed mainly by below-investment-grade corporate loans. Tranches carry different risk and return profiles. Investors in CLOs face risks including interest-rate exposure, credit losses on the underlying loans, reduced liquidity in secondary markets, prepayment risk and defaults among assets backing a deal. CLO structures and manager decisions determine how cash flows and losses are allocated across tranches.

Regulatory and product documents for Reckoner’s funds note standard ETF mechanics and fund-specific risks. Shares trade on exchanges and may trade at prices that differ from net asset value; brokerage commissions apply. Prospectuses list principal risks such as management risk, novel structure risk, affiliated fund risk, CLO risk, non-diversification, new fund risk, leverage and liquidity risk. Investors are advised to read the prospectus before investing.