Overview

Structured credit markets present one of the most compelling risk-return opportunities in fixed income today. As we move through 2026, the convergence of attractive spread levels, improving fundamental credit quality, and technical supply-demand dynamics creates a favourable environment for selective structured credit exposure.

CLO Market Dynamics

Collateralised Loan Obligations (CLOs) remain the cornerstone of the structured credit market. After a record year of issuance in 2025, the CLO market is poised for continued growth in 2026, driven by robust investor demand and a healthy pipeline of leveraged loan collateral.

Key themes in CLO investing for 2026 include:

  • Spread normalisation across tranches, with AAA spreads tightening while mezzanine and BB tranches offer compelling risk premiums
  • Improved collateral quality as refinancing activity strengthens borrower balance sheets
  • Active manager differentiation becoming increasingly important as the market matures
  • Growing European CLO market offering diversification opportunities

ABS Opportunities

Asset-Backed Securities (ABS) across consumer and esoteric asset classes offer attractive relative value. We see particular opportunity in:

  • Auto ABS: Strong underlying collateral performance supported by a healthy used car market
  • Consumer Credit ABS: Attractive spreads compensating for normalising delinquency rates
  • Esoteric ABS: Complexity premiums in niche asset classes such as aircraft leases, data centres, and franchise royalties

“The complexity premium embedded in structured credit is not a risk to be avoided but a return source to be captured through disciplined fundamental analysis.”

Risk Management Framework

Successful structured credit investing requires a rigorous risk management framework that addresses:

  • Collateral analysis: Deep fundamental analysis of underlying loan pools
  • Structural protections: CLO and ABS structures offer seniority, over-collateralisation, and cash flow waterfalls that enhance credit quality
  • Manager selection: In CLOs, the quality of the collateral manager is the primary determinant of performance
  • Scenario analysis: Stress testing portfolios against a range of economic outcomes

Portfolio Implications

For fixed income portfolios, structured credit offers:

  1. Yield enhancement relative to equivalently rated corporate bonds
  2. Diversification through exposure to different underlying credit risk factors
  3. Floating rate exposure reducing duration risk in a rising rate environment
  4. Seniority in the capital structure providing downside protection

Our Positioning

We maintain a selective overweight to structured credit, focusing on senior and mezzanine CLO tranches where we are adequately compensated for the complexity and illiquidity. Our approach is grounded in bottom-up fundamental analysis, with rigorous assessment of collateral quality, structural features, and manager capabilities.

Conclusion

Structured credit markets offer experienced investors the opportunity to capture meaningful complexity premiums. With disciplined manager selection, rigorous fundamental analysis, and careful attention to structural protections, structured credit can enhance portfolio yield while maintaining a strong focus on capital preservation.