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A taste for risk helps the APS CLO Total Return Top 100

| 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

The managers

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

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