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A little risk again helps managers break into the Top 100

| June 7, 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 May again went to managers that took a little more than average risk. The APS CLO Total Return Top 100 beat the S&P/LSTA index by an average of 50 bp while the average deal below the Top 100 lost by 8 bp. Anchorage Capital Group and CIFC Asset Management placed nine deals in the Top 100 and led a list of 41 managers putting deals on the board.

Cumulative returns against the S&P/LSTA ranged from +3.04% to – 2.73%

Cumulative 3-month returns through May in the APS CLO Total Return Top 100 ranged from 3.04% TO 0.31% above the index while returns below the Top 100 ranged from 0.31% above to 2.73% below (Exhibit 1).

Portfolios in the Top 100 for May showed an average life-to-date market beta of 1.01, or a level of riskiness slightly greater than the average loan in the S&P/LSTA. Portfolios below the Top 100 showed an average beta of 0.90. This is the second month in a row that a higher beta helped deals break into the Top 100.

Managers taking a little extra risk rode a rally in leverage loans as the average price rose from $96.41 on February 20 to $97.43 on May 20. Spreads on leverage loans measured by the yield difference between the S&P 100 B/BB index and 1-month LIBOR tightened from 359 bp to 342 bp.

APS tracks monthly returns on all CLO loan portfolios starting three months after deal pricing. 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 May includes cumulative net returns on 696 CLO portfolios for the three most recent reporting periods ending May 20.

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 if the manager changed portfolio strategy. The beta does show the manager’s historic average risk relative to the broad market.

Exhibit 1: The APS CLO Total Return Top 100 for May 2019

Note: 3M shows estimated returns on the CLO leveraged loan portfolio net of returns over the same period on the S&P/LSTA index. Alpha shows average excess return in basis points per month over the life of the deal usually starting six months after pricing. Beta shows the usual return in the CLO leveraged loan portfolio for a 1% return in the S&P/LSTA index. Deals with no alpha and no beta had less than 18 months of performance. Source: Amherst Pierpont Securities

Anchorage and CIFC lead

Anchorage Capital Group and CIFC Asset Management led a list of 41 managers placing nine portfolios in the Top 100 (Exhibit 2). Anchorage placed all of its active deals with at least three months of performance, while CIFC placed nine of 15. Apollo Global Management and Prudential Financial followed, with Brigade Capital Management and Triumph Capital Advisors tied for fifth.

Manager performance over time should reflect both total portfolio risk, or beta, and ability to generate excess return through different market conditions, or alpha.

Exhibit 2: The managers of the Top 100

Source: Amherst Pierpont Securities

 

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