Institutional Conversations

0:06

Hi, everyone.

0:06
Welcome to Episode 2 of our Institutional Conversations podcast.

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I'm Chris Crea, our ETF strategist for Asia Pacific.

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And today I'm joined by my colleague Derek Fin, who runs our private credit business Strategy and Development for Asia Pacific.

0:21
Hey, Derek.

0:22
Hey, Chris.

0:22
Good to be here.

0:25
Why don't we start off with the headlines?

0:26
We've been seeing quite a bit of negativity and emotional language, like cockroaches, for example.

0:33
Why is private credit being in the news lately?

0:36
Yeah, you really nailed it.

0:38
Unfortunately, private credit has been making all the headlines for all the wrong reasons over the past six months or so.

0:48
I really want to take a step back by defining private credit because I think it's very easy to get lost into defining private credit as this one massive asset class, right?

1:00
And as we know, there are a lot of different forms of private credit.

1:04
You have the less liquid side through corporate direct lending, which tends to be more non investment grade credit where you could get those higher yields potentially.

1:14
But on the other side of the spectrum, you have investment grade, high quality, publicly rated AAA access to what we like to think of as the liquid side of private credit.

1:27
So something like AAA CLOs.

1:30
So if you look at CLOs and investment grade CLOs, all those headlines around cockroaches and private credit, credit risk, liquidity concerns, valuation concerns, those don't apply to the investment grade part of the market.

1:46
So despite all the fear mongering and the headlines, we've still continue to see a lot of demand, particularly on the higher quality part of the private credit market.

1:57
That's a really good point, Derek.

1:59
Private credit isn't just one asset class.

2:01
You don't just have direct lending to your point, you have investment grade options out there and you have daily liquidity options as well, not just exposures with quarterly liquidity.

2:13
For example.

2:14
You mentioned these headlines are driving conversations in this asset class particular CLO AAA notes.

2:22
What else is driving this conversation for you?

2:25
Yeah, I think what's been interesting is you've seen the development of historically asset classes that were only available to institutional clients that have now created these through market innovation accessed by wealth clients as well.

2:43
And some of the concern there is, you know, these are asset classes that have historically only been assessable to institutional investors.

2:51
So why would a sophisticated institutional client that can either directly buy, I'm going to stick to CLOs, a AAA CLO tranche or CUSIP with their own portfolio management team, why would they decide to use, call it a more retail friendly product like an ETF?

3:10
And I think one of the main reasons there, if you think about the historical evolution of access to retail products, they've had to be in certain ways a diluted form of an institutional product, right?

3:24
Either because of regulation needs from the wealth or private bank channels or just that the higher fee component to manage a retail product. Today you're, you have institutional grade products with institutional fees.

3:41
So it makes more and more sense for institutional investors to maybe spend more of their time and resources and perhaps that the more manager selection due diligence specific investments and consider a call it ETF wrapper for some of the higher quality aspects of their portfolio.

4:00
What are some of the challenges you encounter when discussing CLO AAA notes as an asset class with investors?

4:09
Yeah, it's really interesting.

4:10
Unfortunately, CLOs, we share the same acronym as, as CDOs.

4:15
Of course, we, we know CLOs stands for collateralized loan obligations, CDOs are debt obligations.

4:23
They're synonyms, but they're very different.

4:25
CLOs, specifically AAA and AA CLOs, have actually never had a default historically, even during the financial crisis. (Source: Moody’s, Morgan Stanley Research, Data from 1993-2023. Past performance does not predict future returns.)

4:36
You compare that of course, to CDOs, which led to the financial crisis through subprime lending, you're looking at, you know, meaningful credit losses in AAA investments.

4:48
That's just had never been the case for AAA CLOs. Unfortunately, even with institutional, very sophisticated institutional clients. I've been in meetings where I'll mention CLOs and the client will practically walk out of the meeting because their CIO or their Investment Consultant bundle that up with CDOs.

5:10
So I think that education component is still has come a long way, but there's still some ways to go into getting clients comfortable with an asset class that sounds more complex than it actually is.

5:20
Right, so there's definitely some perceived complexity around this particular asset class.

5:25
However, it's clearly very institutional in quality given some of the, you know, the stats that you just walked through.

5:33
And despite all of this, we are still seeing significant adoption of CLO AAA notes by institutional investors for a range of different applications.

5:43
So what are some of the applications you're seeing investors use CLO AAA notes for?

5:50
Yeah, it's, it's really a wide gambit.

5:53
You think about newer institutional investors into private credit kind of looking for just the next step beyond fixed income, investment grade, fixed income AAA CLOs is a great fit for that.

6:05
You're adding more spread, more yield, you're diversifying away from some of that duration risk.

6:12
And you're actually also getting access to an alternative credit access class that has lower correlation to traditional assets.

6:23
The other aspect is clients that have already invested in AAA CLOs.

6:27
They might have a dedicated team that invest in the entire CLOs stack from AAA down to double B and even CLO equity.

6:36
And rather than spend their team's resources and in picking those AAA tranches, they're happy to outsource this given how efficient accesses today in an ETF wrapper, how low cost it is and then everything in between.

6:51
I think the most common use case has been somewhat of a cash plus just given how high quality this space is.

6:58
Again, never had a default historically even during the financial crisis.

7:04
I love your point around access and the ETF vehicle has changed this pretty meaningfully for the better.

7:11
I mean to your point, CLO AAA notes, probably syndicated bank loans.

7:15
These are asset classes that have historically been very difficult for investors to access unless you were a very large influential investor like a large pension fund or insurer.

7:26
But the ETF has democratized access to this institutional quality asset class and like you said, allowed investors to move away from the traditional allocation to U.S.

7:39
Treasuries, U.S.

7:39
dollar, investment grade credit, high yield, and really diversify the fixed income sleeves, improve their yield outcomes, improved quality profile of their fixed income portfolio, and incorporate some diversification across the capital stack.

7:56
So really exciting.

7:58
Some great conversations happening out there.

7:59
Derek, it sounds like. Well, everyone with that, this has been Episode 2 of our Institutional Conversations podcast.

8:06
Derek, thank you very much and we'll see you all next time.

8:09
Thanks, Chris.

0:09

Welcome to our inaugural podcast, Investments Insights Institutional Conversation.

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I'm Brian Levitt.

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I'm the chief global market strategist and head of Strategy and Insights at Invesco.

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Today, I am thrilled to be joined by Chris Hamilton.

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Chris is the Head of Investment Solutions Asia Pacific ex Japan.

0:28
Chris, welcome to the inaugural podcast.

0:31
Brian, thank you for having me.

0:32
It's amazing to be here and I really look forward to having this conversation with you today.

0:36
Yeah, so this is a new series.

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We're going to be releasing these episodes each month.

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It's available to listen to an AP institutional website, and we're going to be talking about a whole variety of things.

0:47
So Chris, I wanted to jump right in.

0:50
We've moved into this new year.

0:52
We produced an outlook talking about a resilient economy, perhaps the need to rebalance.

0:57
In fact, the title was resilience and rebalancing.

1:00
And so, so looking at a world where growth could pick up modestly, central banks are relatively supportive.

1:08
Anything not to like about that?

1:10
Yeah.

1:10
So I mean, I think in general our kind of mindset and what we see from clients is an environment where clients want to take risks, they just want to do thoughtfully and intelligently.

1:20
And I think really the phrase resilience and rebalancing kind of encapsulates and captures what Asian investors are trying to do in 2026.

1:27
You have very concentrated equity markets at the high end, but clients know they need to be exposed to participate in that growth opportunity.

1:36
So I think clients want to take risks.

1:38
They just want to be kind of guided and advised on how to effectively do that, how to globally diversify.

1:43
So it's very much a thoughtful nuance conversation around diversification, asset allocation, waiting, appropriate geographies and sectors versus just kind of a more of a binary kind of risk on risk off.

1:55
And one of the nice things is last year we did get to have what I would categorize as something of an everything bull market.

2:02
It was hard to find a part of the market that didn't do well.

2:04
And you know, when investors think about concentration or valuation, you hope that there's opportunity to do well in other parts of the market besides mega cap tech.

2:16
And from the perspective of a pickup in economic activity and easier policy, perhaps that does continue to build this opportunity where other parts of the market do well, whether it's non-us or whether it's smaller capitalization or value oriented portfolios.

2:34
Yeah, it makes complete sense.

2:36
And I think from our perspective, we see over here in Asia when we're kind of engaging clients, that notion of geographic diversification does really come into play.

2:45
And there's really been a shift in change, particularly in the sentiment coming out of China since the end of 2024, which has been pretty meaningful.

2:53
So investors have really they started to look at opportunities kind of in that space that really picked up in 2025.

2:59
I think the notion whole story around kind of de dollarization comes into play in a lot of my conversations.

3:07
Geopolitics comes into play.

3:08
And I think all that points to kind of a more diversified portfolio at least like from an equity perspective.

3:14
And then also kind of looking outside of public markets, thinking of what are ways investors can harvest return premium outside of traditional public markets, so leaning into private markets And Asian investors are typically, they're on a bit of a different journey in that space.

3:27
And US investors are.

3:28
So they don't have this kind of built out diversified exposures there.

3:32
So a lot of opportunities to have conversations across both public and private.

3:36
But like you said, I think the environment in general is very good for taking risks, just kind of doing so intelligently and thoughtfully, being cognizant of some of these more macro risks that are embedded in the environment right now.

3:47
It sounds like your clients in Asia and our clients in North America are concerned about similar things, whether it's geopolitical risk or implications for the dollar.

3:57
I try to push back a little bit, or at least with regards to geopolitical risk, help them put a lot of what's going on in the world into some perspective.

4:05
I always remind them with any geopolitical event, does it change the trajectory of the economies of the major players of the world or does it change what the central banks are going to do?

4:17
And for the most part, at least up until now, the answers to those questions have generally been including Venezuela.

4:25
Yeah, I completely agree with that really quickly.

4:27
So I mean, having similar conversations, I do think the notion of geopolitical risk, at least in Asia does, I think it overplayed from a narrative perspective and kind of having those conversations, OK, what are the kind of the ultimate implementations of ultimate implications of this and kind of what you see is the market absorbing some of this narrative like very, very well.

4:48
Well, you know, we'll hear the narrative.

4:49
Well, geopolitical risks is at all-time high.

4:51
It's like, well, yes, so are global equities too.

4:53
I completely agree with these things.

4:55
I wanted to just kind of interject there and mention that.

4:57
Yeah, I agree.

4:57
And the de-dollarization concept, I choose to generally frame it as less of de dollarization, but perhaps the first opportunity to diversify away from the dollar in a very long time.

5:09
And the thing about the whole strong dollar environment, I would argue that part of that exceptionalism of the US was very powerful responses to 2020, but then also great bellwether tech businesses.

5:22
And what you're seeing now is policy support in most places of the world, right, a gradual Fed easing cycle.

5:30
And what you're also seeing is a lot of great tech businesses not only in the United States, but also in China and other parts of the non-us markets.

5:38
Absolutely, Yeah.

5:39
So I think the de-dollarization piece comes up here.

5:42
It's kind of two-fold, right, where you have a lot of investors who are kind of base or structured around non USD liabilities and they have long USD exposure.

5:52
So they see that asset liability mismatch and I think it creates some consternation there.

5:56
And that's where a lot of the conversation around like de-dollarization comes up.

6:00
Obviously, the China conversation drives that considerably.

6:03
But even that's another area too where I think you have to put the conversation and contact and it's like, well, it doesn't mean that the dollar is going to go from kind of 80-85% of trade volume to 50%, right?

6:15
Even if it does decline, it's going to be a pretty marginal number.

6:19
But like you said, it makes and creates a pretty good opportunity for investors to diversify some of that exposure.

6:25
So if you're an investor in Singapore or Thailand or Malaysia integrating whether it's European based exposure or another kind of currency in the air portfolio actually looks attractive from a risk adjusted return perspective.

6:39
I would argue it's healthier, right?

6:41
It's a broader environment when you think of any risks that may exist out there.

6:46
So anything that you're talking to clients about in terms of things that they may want to hedge or any challenges that they may want to approach within their portfolios.

6:55
Yeah, it's a great question.

6:56
So I think right now, you know, the investors we talked with are really trying to effectively balance that notion of market participation and adequate protection in a portfolio.

7:07
Obviously, diversification, whether it be from a geographic perspective or from a sector perspective is a great way to think about that.

7:15
But I mean the notion of diversification stretches beyond that.

7:17
It goes into private markets, it goes into kind of other asset classes, other alternative asset classes.

7:23
It also goes into thinking about whether it be more defensive or kind of hedging-based solutions in a portfolio.

7:30
So strategies that maybe have kind of a natural defensiveness embedded in and think about options income type strategies or strategies that automatically or effectively mitigate volatility when risk is high.

7:42
So some of those more unique solutions I think are coming into play right now, particularly with large institutional asset owners who've made pretty significant gains over the last, let's call it six or seven years who want to inject some levers of protections.

7:56
Like some of the more complex solutions are really kind of coming into the fold right now and you see some of the bigger asset owners start to implement those.

8:04
And you'll also see that momentum kind of go downstream with some of the smaller to mid size investors.

8:08
It's interesting how you and I are sitting very far apart from one another in terms of where we are in the world.

8:14
And yet the views, the conversations, a lot of things that are on investors’ minds right now seem incredibly similar, which probably shouldn't be a surprise.

8:22
So Chris, I really enjoyed this conversation.

8:25
Thank you so much for engaging with me in it.

8:28
You know, we hope this episode can encourage you to think differently about the asset allocation opportunities as well as some of the challenges we have in 2026.

8:37
Thank you all very much for joining us on this first episode of the Investment Insights institutional Conversation.

8:44
Chris, thank you for joining.

8:46
If you enjoyed today's discussion, don't forget to check out our next episode, the website.

8:52
Stay tuned.