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Lower risk portfolios lead the APS Top 100 into June

| July 12, 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.

Managers holding lower risk portfolios helped generate the best total returns on CLO leveraged loans for the three months ending in June. The APS CLO Total Return Top 100 beat the S&P/LSTA index by an average of 88 bp, although a few standout performances inflated that margin. CLOs below the Top 100 trailed the index by an average of 8 bp. Anchorage Capital Group and CIFC Asset Management led the list of managers with deals in the Top 100 for the second straight month by each placing eight deals on the board.

Cumulative 3-month returns through June in the Top 100 ranged from 18.22% to 0.28% above the index (Exhibit 1). Three deals managed by Highland Capital Management raised Top 100 performance by printing cumulative returns of 18.22%, 16.98% and 8.67%. All three deals came to market before 2008 and are well past the end of reinvestment. Each reported substantial gains in the market value and par amount of portfolio loans. Excluding those deals, the Top 100 beat the index by an average of 46 bp.

For the remaining 634 CLO tracked by APS that fell below the Top 100, cumulative performance against the index varied from 0.28% to -4.18%.

Deals in the Top 100 with a track record of returns long enough for reliable estimates showed a life-to-date average excess return of 4.6 bp a month and a beta or sensitivity to the S&P/LSTA index of 0.93. That compares to deals below the Top 100 with an average excess return of 2.0 bp and a beta of 0.97. This is the first time since APS began issuing the Top 100 this year that the leading deals showed a lower beta than the lagging deals.

The better performance by relatively less risky, low beta portfolios partly reflects the drop in averaged leveraged loan prices in May and June. The price of an average S&P/LSTA loan from April 30 to June 30 dropped from $97.52 to $96.79. Low beta portfolios tend to drop by less than the average.

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 June includes cumulative net returns on 734 CLO portfolios for the three most recent reporting periods ending June 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 June 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 or unresolved data reporting errors. Source: Amherst Pierpont Securities

Anchorage and CIFC lead again

Anchorage Capital Group and CIFC Asset Management led a list of 40 managers by placing eight portfolios in the Top 100 (Exhibit 2). Anchorage placed eight of nine active deals with at least three months of performance, while CIFC placed eight of 19. ICG Debt Advisors, MidOcean Credit Fund Management and Onex Credit Partners rounded out the top five.

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 for June 2019

Source: Amherst Pierpont Securities

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