9Questions is our Q&A series featuring key decision-makers in the corporate credit markets — get in touch if you know who we should be talking to!

Even if the majority of spread widening and contagion risk made its mark post-quarter ending, some words of warning may have been signposted. CLO funds in 9fin’s database returned just 0.26% on average in August, down from 1.44% in July, before falling further to 0.03% in September. Overall, funds returned a cumulative 1.74% on average in Q3, compared to 1.83% in Q2.

Janne Gustafsson, senior portfolio manager for structured credit at Ilmarinen, a Finnish pension fund, specialising in both private and public markets, talks to 9fin about how CLO strategies remain attractive despite falling rates and flat equity returns this year, disappointing private equity returns, the value of public ratings, and Finnish summers.

1. Captive CLO equity funds continue to gain traction. From your perspective, how are you weighing captive versus third-party CLO funds? And how does that fit in your portfolio?

Captive equity funds have normally only one layer of fees but obviously you are limited to one CLO manager only (which is not a problem, if they are very good). Third party CLO equity funds have two layers of fees, so they may be more challenging to get comfortable with from that angle (especially if they do not do any trading to gain extra returns, or for risk management), unless they are somehow able to get meaningful discounts from the underlying CLOs that they offset their own fees.

In general, it’s very difficult to hedge structured credit investments effectively and attempts to do so often lose money. The best approach is diversification and making strong, uncorrelated investments, so that not everything moves down at once. CLO equity is attractive when balanced with more stable, lower-return investments. Long-only CLO strategies aren’t a large part of my portfolio, partly due to volatility. Long-only CLO equity represents roughly 10% of the book.

2. When you commit to CLO funds, do you prefer closed-ended or open-ended structures? And what are the must-haves on terms?

Finnish pension funds have a target return for the overall system. We currently have a reform underway, so that may change going forward, but generally speaking, the target has been inflation plus 3.5%.

ETFs are typically focused on triple-A assets, which we generally avoid since our return targets are quite high. On the ETF front, it’s interesting to see how the market functions when we enter a bear market.

When I invest in CLO funds, either closed-ended or open-ended structures can work. The key is that the fund’s liquidity profile must match the liquidity profile of the underlying assets and strategy. There are no strict must-haves, but I have preferences for certain features, which are typically only available in customised or fund-of-one structures.

On a mark-to-market, open-ended fund basis, you have to be mindful of how they perform in a downturn. Volatility matters, which is why I focus a lot of time on ensuring the portfolio remains resilient in a downturn.

It’s somewhat of a barbell strategy with CLO equity, partly through credit hedge funds that can go long and short, and partly through funds where I invest directly in CLO equity and also invest directly in CLO tranches (often triple-Bs). I make sure the portfolio is balanced and not overly concentrated.

3. How has performance across your credit allocations been this year? Are CLOs still delivering the excess returns investors hoped for in this higher-for-longer environment?

On a mark-to-market basis, CLO equity has been relatively flat this year. It hasn’t been a great year for CLOs, though that’s not particularly significant in the broader context. Looking at a forward-booking basis, how does CLO equity compare with private equity and private credit?

Private equity faces its own challenges. Returns have been disappointing as business conditions have become more difficult and not just about financial engineering. Opportunities to earn the 15–20% annual returns seen in the past are becoming rarer, and the market for such deals is likely to shrink.

There’s still a lingering overhang where not all fund valuations have adjusted. If public equity markets eventually decline, for instance, if there’s a pullback in AI-related stocks, we may finally see private equity marks come down as well. If that happens, private credit marks could follow. That adjustment might still be a few years away. In the meantime, spreads across markets continue to tighten.

The overall book is very well diversified across different strategies, including outside of CLOs, which has helped a lot this year.

4. What are your thoughts on the SRT market?

I have been investing in SRTs for the past seven years or so. I haven’t added this year, since the market is reasonably hot also in that segment, although I’ve heard that several good (perhaps bilateral) deals can still be found in that space.

Previously, it served as a great diversifier for CLO equity, returning Euribor + 8% on a net basis, especially in bilateral deals. I would say the public side of SRTs may be more vulnerable to volatility in a downturn compared to BSL CLOs.

5. As rate cuts start to come through, how are you thinking about duration and risk?

I really like the floating rate nature of the CLOs. I’m investing on the basis of the spread of the assets over the risk-free rate of return (rather than on the basis of the total return of the assets), so I’m happy that I do not have to have a view where the rates will go in this market.

6. When you back a manager, beyond track record, what do you look for in terms of discipline, risk management, or alignment of interest?

When it comes to higher risk investments like CLO equity, I like to work with people with a high degree of professionalism, who I get well along with, who have time to listen to my ideas and implement them the way I like (this would be related mostly to setting up fund-of-ones), and also who are straightforward to talk to when things start to get rough or difficult in the markets. Generally, they may be either nimble smaller firms or similar teams within larger managers.

7. What are LPs like yourself most focused on right now: yield, diversification, downside protection? Has sentiment shifted compared to a year ago?

I’m focused on balancing the return versus volatility while trying to avoid any potential current or future landmines (speaking of further credit cockroaches there), as there may be bouts of even more severe volatility in the future but at the same time you need to earn a decent return also in a tight credit market.

I’m trying to stick to strategies with a reasonably good view into the underlying credit risk (e.g., those with credit ratings and market prices), so more focused on BSL CLOs and generally public market strategies, rather than anything in private credit where it is more difficult to get a good view into the underlying risk.

I’m not overreaching for yield currently. I think the sentiment has shifted with First Brands so that people are now aware that there are material risks out there, and one wants to take care not to be the one investing in the next First Brands-style blowup. This probably means that the credit standards have already tightened compared to the past, and various loans cannot be refinanced anymore when they reach maturity in the coming years.

8. Looking into 2026, where do you see the most compelling opportunities in credit and alternatives, and conversely, what’s keeping you up at night?

I think you need to have a balanced portfolio of well-thought-out strategies with good managers in various credit segments without overreaching for yield. There are still good deals in many areas, but the number of potential landmines is increasing.

What should keep investors up at night are the kind of (usually private) credit strategies that promise mid-teens net returns with, say, a 0.02% historical annual loss rate (and with no competent credit ratings), as the eventual outcomes may be highly correlated with the macro / business cycle. And also avoiding anything with a “subprime” label attached to it, like subprime credit cards. I’ve seen some such fund proposals, and it seems that offering high returns is often necessary to attract investors to more complex strategies.

I do not generally invest in such strategies and prefer at least to have competent ratings for the underlying (corporate) loans if possible. As I’m looking more into strategies in the public markets, I’m mostly focused on managing the volatility of my book by ensuring a sufficient level of diversification and de-correlation with the market risk, etc., but it really does not keep me up at night that much, so far at least.

There are good opportunities in direct lending, but fees and operational costs can make low-yielding private credit investments less appealing, as the additional costs can more than offset the modest extra returns. In my view, it’s more sensible to invest in broadly syndicated loans.

9. What's something Finnish you really love? It could be a place, a food, or a word.

I really love the Finnish summer and Finnish summer houses. What many people don’t know is that Scandinavia is a wonderful place to be in the summer. With climate change, the weather is improving. When it doesn’t rain, temperatures can reach 25°C, and there’s plenty of sunlight. In mid-June, you can have almost 24 hours of daylight. Finland is home to about 100,000 lakes (among the most in the world) and many people own summer houses by a lake or in the archipelago. Going to the sauna at a summer house is also a cherished tradition.

Explore our full collection of 9Questions interviews here.