The APS CLO Total Return Top 20
admin | February 22, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The average large active CLO manager outperformed the S&P/LSTA index in the fourth quarter last year by 16 bp before fees while the average APS CLO Total Return Top 20 manager beat the index by 39 bp. And the top performer in the fourth quarter, 40/86 Advisors, navigated a volatile quarter to finish ahead of the index by 71 bp.
CLO managers from October through December faced one of the roughest markets in leverage loans since mid-2015 with the S&P/LSTA index down 3.45%. Despite the better returns in the leveraged loan portfolios of larger CLO managers, average absolute returns still finished the quarter in the red.
Managers with a range of historical strategies finished in the APS CLO Total Return Top 20 (Exhibit 1). Based on historic portfolio returns, 40/86 Advisors typically holds more conservative loans than the index average. That almost certainly helped the manager as loan prices fell through late 2018. Zais, on the other hand, tends to hold riskier portfolios than the other five best finishers. Denali also tends to hold conservative portfolios. Golden Tree and Oak Hill, rounding out the five best performances for the fourth quarter, come closer to index risk levels.
Exhibit 1: APL CLO Total Return Top 20
Note: Estimated total returns in CLO leveraged loan portfolios. Total return is calculated based on periodic changes in total portfolio value including mark-to-market gains or losses, trading gains or losses, accrued or received interest, cash and reinvestment. Return is calculated before distributions to CLO debt or equity and before manager fees. A deal is considered active if its principal balance is greater than 10% of its maximum deal or collateral amount. Returns from a CLO ramp-up period are excluded. Additional adjustment to returns made for refinancing, resets, X notes and other sources. Comparison of returns across managers may be affected by differences in performance reporting dates. APS CLO Total Return Top 20 is limited to managers of five or more active deals. Source: Amherst Pierpont Securities.
Manager performance over the most recent 3- and 6-month periods has varied significantly from one period to the next. Performance in the 3-month period ending in January was positively correlated with 3-month performance ending in October, but only modestly (Exhibit 2A). Performance in the 6-month period ending in January was positively correlated with 6-month performance ending in July, but again only modestly (Exhibit 2B).
Exhibit 2A: A loose correlation of 3-month TRRs Exhibit 2B: A loose correlation of 6-month TRRs
Source: Amherst Pierpont Securities
The performance of individual CLOs over the three months ending in January varied much more widely than the performance of managers, largely because manager performance reflects a weighted average of their individual CLOs; averages should be more stable than individual observations. At the extremes, some individual CLO leveraged loan portfolios underperformed the index by nearly 2.0% while others outperformed by 1.6%, creating a 3.6% range from high to low in 3-month performance (Exhibit 3).
Exhibit 3: CLO total returns for the three months ending January varied widely
Source: Amherst Pierpont Securities
With the S&P/LSTA index almost back to its peak of early October, returns in CLO leveraged loan portfolios should bounce back sharply from their early January lows, with high beta portfolios likely to bounce back the most.
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