People’s Pension is investing £260m in AAA-rated collateralised loan obligations (CLOs) with Invesco, in what is believed to be the first UK master trust allocation to the asset class.
The investment will aim to combine direct CLO exposure with Invesco’s AAA CLO ETFs, forming 5 per cent of People’s Pension’s default fixed income allocation.
The ETF structure gives the scheme the liquidity and daily pricing sought by DC defaults.
Invesco says AAA CLO tranches have the potential to offer DC schemes strong risk-adjusted returns and diversification.
Earlier this year, People’s Pension appointed Invesco to manage its fixed income portfolio.
The global CLO market has nearly tripled in size over the last ten years, standing at approximately $1.4tn.
Invesco predicts that the CLO ETF market, which is still in its infancy, has the potential to grow substantially from both traditional and non-traditional institutional investors. The asset manager says CLO AAAs can offer a yield pickup that far outpaces similarly rated corporate bonds, with volatility levels two to three times lower than the broad US and European investment grade corporate bond markets over the past five years.
CLOs and other securitisation products have existed for decades,but took a reputational hit during the global financial crisis of 2008. This was caoused by the collapse of collatorised debt obligations (CDOs), which bundled up retail mortagage products into financial instruments. These have often been confused with CLOs which bundle corporate loans. CLOs fared far better during the global financial crisis. As a result of the crisis, regulation of securitised products was increased significantly. In recent years regulators around the world have begun to take steps to relax this regulation.
Charlotte Vincent, co-head of fixed income for People’s Pension, says: “We wanted to diversify our fixed income exposure and offer our members an innovative long-term income generating solution as part of their default investment. We believe Invesco’s ability to access the CLO market through AAA ETFs has made this accessible and offers the transparency, liquidity and investment outcomes we are seeking to achieve. AAA CLOs can be integrated into mainstream fixed income strategies, and we believe delivering these through ETFs, can simplify access. By including CLOs, investors can tap into a broader opportunity set, reducing concentration risk and improving overall portfolio resilience.”
Chris Fagan, chair of the People’s Pension Investment Committee, says: “The best results for members come from true partnership, which is what People’s Pension and Invesco are demonstrating with this announcement. This combines the strengths of asset managers and pension providers to create solutions that are greater than the sum of their parts.”
Scott Baskind, head of global private credit, Invesco: “AAA CLO’s offer the widest choice with the highest potential yield, with only an incremental increase in risk levels. Doing this through an ETF structure also offers the investor the flexibility and transparency to make changes without the traditional operational hurdles of accessing CLO’s within a transparent, liquid, and scalable vehicle.
“For pension schemes seeking to strengthen member outcomes in a challenging fixed income environment, CLO AAA ETFs represent a compelling next step in retirement plan innovation.”
Mary Cahani, head of DC distribution, Invesco says: “We continue to strive to deliver innovative solutions to our clients, who are always looking for new ways to generate income. We have a creative and client focused mindset and through collaboration across the investment, solutions and DC distribution teams we are excited to have been chosen to be the People’s Pension’s strategic partner for this fixed income ETF allocation.”
