Chart to Watch: AAA CLOs, short-duration corporates outperformed cash over the long term
While higher interest rates on money-market and savings accounts may be enticing, we believe sitting in cash may not be the optimal choice for long-term investors. An initial $10,000 investment in short-duration investment-grade (IG) corporates or AAA rated collateralized loan obligations (AAA CLOs) has outgrown cash because the excess returns from credit spread have added up over time.
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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 have added up over time.
- On average over the past 10 years, AAA CLOs and short-duration IG corporates have paid an additional 142 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, volatility1 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 could afford to take on a small amount of volatility in their short-duration holdings to improve their portfolio’s long-term income-earning potential.
1 As measured by 1-year rolling standard deviation from August 2014 to January 2025.
Source: Bloomberg, J.P. Morgan, as of 24 January 2025. Indices used to represent asset classes: AAA CLOs = J.P. Morgan AAA CLO Index, Short-duration IG corporates = Bloomberg U.S. Corporate 1-3 Year Index, Cash / Money market funds = Bloomberg U.S. 1-3 Month Treasury Bills Index. Past performance does not predict future returns.
Some investors who are hesitant to put their short-term cash reserves at risk may feel uneasy with any volatility in 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
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These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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1 minute read
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 have added up over time.
- On average over the past 10 years, AAA CLOs and short-duration IG corporates have paid an additional 142 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, volatility1 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 could afford to take on a small amount of volatility in their short-duration holdings to improve their portfolio’s long-term income-earning potential.
1 As measured by 1-year rolling standard deviation from August 2014 to January 2025.