You may have thought that collateralized loan obligations (CLOs) were discredited during the financial crisis of 2008-09.
But they're showing up more and more in mutual funds, according to
The Wall Street Journal.
CLO issuers purchase corporate loans. Investors in CLOs garner income from principal and interest payments made by the companies taking the loans.
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The Journal says CLOs are offering returns as high as 20 percent. Among the mutual funds
buying CLOs are bank loan funds, which purchase loans made to low-rated companies.
Loan mutual funds and business-development companies, another kind of individual-investor loan fund that buys CLOs, have seen an inflow of more than $60 billion this year, according to Keefe, Bruyette & Woods and Lipper, The Journal reports.
While CLOs now offer higher returns than many other fixed-income investments, they are vulnerable if companies fail to pay back their loans. That's what happened in 2011.
Many retail investors have no idea they're involved with CLOs.
"The retail broker community doesn't know to ask those questions," Carlynn Finn, vice president for investor relations at Prospect Capital, told The Journal. "They are focused on dividend and yield."
Howard Marks, chairman of Oaktree Capital, sees the increased investment in CLOs as part
of "another upswing in risky behavior," he writes in
Barron's.
"It began surprisingly soon after the [financial] crisis, spurred on by central bank policies that depressed the return on safe investments. It has gathered steam ever since, but not to anywhere near the same degree as in 2006-07."
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