The Plutus CLO Fund: seizing market opportunities

As with any investment, your capital is at risk.

In the turbulent early months of 2020, as the world grappled with the onset of the Covid pandemic, the Multi Asset Team identified a highly appealing and bespoke investment in the structured finance market. Senior tranches of European Collateralised Loan Obligations (CLOs) were offering returns well above their typical range, which made for an enticing prospect.

However, while we recognised that senior CLO tranches were well-insulated from capital losses, their typical return profile made them less attractive than riskier, higher-yielding tranches. Therefore, a key additional feature that made this opportunity particularly attractive was the ability to apply financial leverage to amplify returns.

While our broad investment mandate allows us to manage holdings in diverse ways, we partnered with Prytania, a trusted third-party manager specialising in structured finance, to help bring this vision to life. Our relationship with Prytania, which dates back to 2008, makes it an ideal collaborator for this innovative venture. This partnership led to the creation of the Plutus CLO Fund, granting us access to the niche market of structured finance.

A bespoke offering

The Plutus CLO Fund was designed to offer broad and actively managed exposure to the most senior tranches of CLOs (AA-rated and better), with leverage applied to maximise returns. Our Multi Asset strategies became the sole holders of the fund, which launched in 2020.

While initial returns were positive, there were periods of heightened volatility during its four-year lifespan. The most notable turbulence occurred in 2022, when the fund experienced significant performance fluctuations. This was initially due to the broader market sell-off caused by rapidly rising global inflation and the subsequent hiking of interest rates, which was then compounded later in the year by the UK’s mini-budget and the resultant demand for liquidity.

Despite these challenges, however, our conviction in the Plutus Fund's long-term potential remained steadfast, and we opportunistically increased our position during this time, enticed by the higher yields on offer.

The Plutus CLO Fund went on to deliver an exceptionally strong recovery, returning approximately 50 per cent over the next two years, largely vindicating our initial thesis. The fund's performance demonstrated the power of an active bespoke approach and our ability to identify and act on idiosyncratic market opportunities.

Sell discipline

As we progressed through 2024 and given the strong recovery in the underlying asset prices, we observed that returns in senior CLO tranches were normalising to historical average levels. Recognising that the exceptional return opportunity had largely played out, we made the strategic decision to exit our position, locking in a healthy gain.

The Plutus CLO Fund experience reinforced several key principles of our investment philosophy:

1. The value of looking beyond conventional investment options
2. The importance of strategic partnerships to access specialised expertise
3. The necessity of maintaining conviction through short-term volatility

Reflecting on our experience, the Multi Asset Team’s investment in structured finance not only delivered good returns but also validated our creative approach and willingness to pursue unique opportunities alongside more conventional ones.

It also underscored the importance of maintaining a long-term perspective in the face of short-term market fluctuations and demonstrated the benefits of identifying market inefficiencies through bespoke solutions.

Base rate: UK Bank of England.

Source: Revolution. Sterling. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.

Past performance is not a guide to future returns.

Risk factors

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in November 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for profit and loss

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

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Past performance is not a guide to future returns.

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