AAA CLOs and short-duration corporate bonds have outperformed cash over the long term

Key takeaways

• AAA CLOs and short-duration IG corporates typically pay a credit spread, or additional income, over cash. This spread is an important component of total return because the excess returns from credit spread can add up over time.
• On average over the past 10 years, AAA CLOs and short-duration IG corporates have paid an additional 141 basis points (bps) and 69 bps over the risk-free rate, respectively, compared to 0 bps for cash/money market funds. Over the same period, AAA CLOs and short duration IG corporates recorded higher, albeit still very low, volatility (as measured by 1-year rolling standard deviation) of 1.4% and 1.5%, respectively.
• In our view, aside from maintaining a modest cash allocation for immediate needs (0-3 months), we believe investors would be better served over the long term by taking on a small amount of volatility in their short-duration holdings to improve their portfolio’s income-earning potential.

Some investors – not wanting to put their short-term cash reserves at risk – may feel uneasy with any volatility within their short-duration holdings. We believe this approach may be overly cautious, as many investors could handle an incremental amount of volatility in exchange for potentially higher returns. Historically, despite occasional drawdowns, AAA CLOs and short-duration IG corporates have ended up comfortably ahead of cash over the long term.

John Kerschner, Head of U.S. Securitized Products

Please note that this article reflects the author's personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.