YCLO provides exposure to collateralized loan obligations (CLOs), which are structured credit products that own portfolios of leveraged loans. The fund targets the floating-rate income and credit spread potential of CLO tranches while managing the complexity of direct CLO investing.
How It Works
The fund invests primarily in investment-grade CLO tranches, focusing on the mezzanine layers (typically BBB to A rated) that offer higher yields than similarly-rated corporate bonds. Franklin partners with BSP to actively manage the portfolio, selecting CLOs based on collateral quality, manager track record, and structural protections. The portfolio emphasizes newer-vintage CLOs with stronger documentation and covenant packages.
Key Features
- Floating-rate exposure provides natural hedge against rising rates unlike fixed-rate credit
- Higher yields than similarly-rated corporate bonds due to CLO complexity premium
- Professional selection and monitoring of CLO positions that retail investors can't easily access
Risks
- CLO market can freeze during credit stress, making positions difficult to sell at fair prices
- Leveraged loan defaults could trigger CLO downgrades, potentially forcing sales at losses
- Complex structures mean investors may not fully understand what they own during market dislocations
Who Should Own This
Best suited for yield-seeking investors comfortable with structured credit complexity who want floating-rate exposure without direct bank loan risks. Works as a satellite position (5-10% of credit allocation) for those looking to diversify beyond traditional corporate bonds and capture the illiquidity premium in CLO tranches.