RCLR provides exposure to the reinvesting tranches of collateralized loan obligations (CLOs) rated BBB to B, targeting the middle and lower investment-grade portions of CLO structures that offer higher yields than senior tranches while maintaining some credit protection.
How It Works
The fund invests in CLO tranches during their reinvestment period, when managers actively trade the underlying loan portfolios to maximize returns. These BBB-B rated tranches sit below the AAA-A senior debt but above equity, capturing spread premium while benefiting from structural credit enhancement. The reinvesting focus means exposure to CLOs in their most active management phase, typically the first 4-5 years after issuance.
Key Features
- Access to institutional CLO market typically requiring $1M+ minimums
- Targets reinvestment period CLOs when managers have maximum flexibility to optimize portfolios
- BBB-B rating sweet spot offers 400-800bps spread over treasuries vs 150-250bps for AAA tranches
Risks
- CLO tranches can lose 50-100% in severe credit cycles as losses eat through subordination
- Liquidity can evaporate in stressed markets - bid-ask spreads widened to 10+ points in March 2020
- Reinvesting CLOs have higher prepayment risk as managers trade loans, potentially reducing yield
Who Should Own This
Sophisticated credit investors seeking leveraged loan exposure with structural protections, willing to accept complexity for 6-10% target yields. Best suited for those who understand CLO mechanics and can stomach mark-to-market volatility during credit selloffs. Natural fit as a 2-5% satellite position replacing high-yield bonds or bank loans in yield-seeking portfolios.