CLOA - JAAA: Recent Underperformance, Necessary Check-In

2025-03-12 09:10:03 ET

Summary

• Over the last month, JAAA has been flat on a total return basis.
• Its underperformance is because a discount has formed; it is persistent and deepening.
• This article discusses possible explanations for the discount, and explores their implications.
• PGIM, competing fund managers to Janus Henderson, have pointed out potential weaknesses in JAAA with their recent commentary.
• The article explores the commentary and its implications for JAAA as well.

Introduction

The Janus Henderson AAA CLO ETF (NYSEARCA: JAAA ) is an ETF that owns investment grade collateralized loan obligations ("CLOs"), in the AAA tranche.

CLOs are vehicles that bundle loans together to create diversified baskets of risky assets, thus reducing the risk. These risky loans are typically senior secured debt, meaning they are backed by assets of some kind, by companies that cannot secure competitive fixed rate debt. Instead, they need to issue these floating rate loans. This is where the risk comes from. It's not that the CLOs are risky within the structure; they get paid out first, especially AAA investors. It's that the companies that issue the loans CLOs buy up are inherently risky businesses by the virtue of them needing to issue floating rate debt. It is typically less preferable than fixed rate debt, at least in our past decade of low rates....

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