A taste for risk helps the APS CLO Total Return Top 100
admin | May 10, 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 best total returns on CLO leveraged loan portfolios for the three months ending in April went to managers that took a little more than the average amount of risk. The APS CLO Total Return Top 100 beat the S&P/LSTA index by an average of 46 bp while the average CLO loan portfolio lost by 11 bp. Ares Management led the list of managers by placing 11 CLO loan portfolios in the Top 100 with 40 other managers also putting portfolios on the board.
The CLO returns
APS currently tracks monthly return on almost all CLO leveraged loan portfolios starting three months after the first deal payment. Returns include loan price performance, trading gains and losses, receipt and reinvestment of cash and accrued interest. CLO reporting periods vary widely, so APS matches return on the S&P/LSTA index to each CLO’s reporting period and then subtracts index performance. Performance for April includes cumulative net return on 695 CLO portfolios for the three most recent reporting periods ending before April 20.
Cumulative 3-month returns through April in the APS CLO Total Return Top 100 ranged from 6.23% to 0.21% above the index (Exhibit 1). Returns in 595 portfolios below the Top 100 ranged from 0.20% above the index to 4.34% below.
Portfolios in the Top 100 for April showed an average market beta over the life of the portfolio of 1.0, or a level of riskiness equal to the average loan in the S&P/LSTA index. Only 62 of the Top 100 had the minimum 12 months of returns needed to calculate beta, but beta in the group varied from 1.28 to 0.77. Portfolios outside the Top 100 showed an average market beta of 0.95 or 95% of the riskiness of the index. Of the 439 CLO portfolios outside of the Top 100 with calculated betas, the range ran from 1.33 to 0.56.
APS measures market beta over the full life of a CLO deal, so the beta going into the most recent 3-month period may not accurately reflect the riskiness of a CLO portfolio during the period if the manager shifted portfolio strategy. It does show the manager’s historic average risk relative to the broad market.
An appetite for risk almost certainly helped in a market where the average leveraged loan price rose from $95.89 at the beginning of February to $97.33 on April 20. A flat yield curve, low interest rate volatility and slow but stable growth should keep supporting leveraged loan prices.
Exhibit 1: APS CLO Total Return Top 100 for the period ending April 20
Source: Amherst Pierpont Securities
Ares led the list of managers placing portfolios in the Top 100 with 11 of 13 eligible portfolios on the list (Exhibit 2). Anchorage Capital Group followed with a notable nine of nine eligible portfolios. Onex Credit Partners came next with seven of 10 eligible portfolios making the Top 100, followed by Octagon Credit Investors with six of 18 eligible portfolios and Brigade Capital Management with five of five eligible portfolios. Brigade tied for the fifth spot with Canyon Capital Partners, posting five of six eligible portfolios, and CIFC Capital Management, posting five of 18.
To the extent a portfolio outperforms the index by holding loans with a higher beta or more risk, performance would only reflect manager skill if a shift to higher risk came in anticipation of a bullish market. If the manager persistently holds loans with either above or below the market average, relative performance should vary with market direction. Manager skill is better measured by excess return over long holding periods and variable markets.
Exhibit 2: Managers with CLO portfolios in the Top 100 for April
Source: Amherst Pierpont Securities
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.