FAAA provides exposure to the senior-most tranches of collateralized loan obligations (CLOs), which are bundles of leveraged corporate loans repackaged into securities. These AAA-rated CLO tranches sit at the top of the payment waterfall, offering yields above traditional AAA corporate bonds with historically minimal defaults.
How It Works
The fund invests in AAA-rated CLO tranches, which have first claim on cash flows from underlying loan portfolios typically containing 150-300 senior secured corporate loans. CLO managers actively trade these loans to maintain credit quality, while structural protections require junior tranches to absorb 30-35% of losses before AAA holders take any hit. The portfolio likely holds 50-100 different CLO tranches for diversification across managers and vintages.
Key Features
- Yields 150-200bps above AAA corporates due to complexity premium, not credit risk
- Zero defaults on AAA CLOs through 2008 crisis when 40% of AAA corporates defaulted
- Floating rate structure provides inflation protection unlike fixed-rate bond funds
Risks
- Liquidity can evaporate in market stress - bid/ask spreads widened to 5-10 points in March 2020
- Regulatory changes could force banks/insurers to sell, creating technical pressure regardless of credit quality
- Extension risk if loan defaults spike - your 5-year investment could become 8-10 years
Who Should Own This
Perfect for yield-seeking investors comfortable with complexity who want corporate credit exposure without duration risk. Works well as a 5-10% portfolio position replacing investment-grade corporates or bank loans. Requires patience through volatility - this is a clip-the-coupon investment, not a trading vehicle. Avoid if you need daily liquidity or can't stomach 10-15% drawdowns during credit panics despite no fundamental losses.