OREANDA-NEWS. Strong U.S. CLO issuance has led to an increase in the number and types of CLO managers. For investors, the broad array of options makes focusing on risks and understanding the manager even more important, according to a new Fitch Ratings report.

Assessing the operational platform of a CLO manager is valuable for investors. A very active market makes reviews even more informative. Add the ever-evolving regulatory environment to the mix, including risk retention rules, and understanding a CLO manager's capabilities becomes that much more important. This is why Fitch's CLO asset manager review process focuses on factors such as an organization's history, infrastructure and controls when managing CLO assets.

'Business concentration and a smaller investor base can make newer CLO asset managers more vulnerable to event risk,' said Director Russ Thomas. 'This risk can be mitigated by demonstrating shareholder commitment and sufficient cash to fund operations in adverse markets, making a proven ability to navigate market cycles a desired trait for managers.'

A lack of separation of responsibilities and independent oversight can also pose control issues for some smaller CLO asset managers. Additionally, formalized risk management and controls are not always a priority for smaller managers, given their limited resources. Larger, institutionally-affiliated managers have established robust frameworks that go beyond compliance with regulation. Moreover, simple investment strategies in a well-identified area can offset the risks posed by limited resources.

Investor confidence in the manger is especially important whenever broader market sentiment changes. 'Although the current credit environment is benign, noticeable differences in CLO performance and how the portfolios are managed tend to appear as broader economic conditions deteriorate,' said Thomas.

'Case Study: Evaluating Your CLO Manager' is available at 'www.fitchratings.com' or by clicking on the link above.