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A first look at manager returns amidst March madness

| April 17, 2020

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 world for CLO managers changed February 23 when the S&P/LSTA leveraged loan index began a 1-month freefall of nearly 21%. All of the larger managers tracked by Amherst Pierpont lost money on their holdings. But a majority still created excess return beyond the broad market exposure, or beta, of their portfolios. Brigade Capital led the list of managers reporting in the 30-day period ending March 20 with an excess return of 61 bp while the weakest manager trailed the broad market by 62 bp. Over the longer 90-day period ending March 20, Brigade led again with a cumulative excess return of 79 bp while the weakest performer trailed the market by 58 bp.

The reported absolute return on CLO portfolios last month depended significantly on the reporting date. Portfolios reporting earlier in the period reflected less of the steady collapse in leveraged loans. Of the 65 managers with five or more active deals tracked by Amherst Pierpont, managers reporting on February 28, for instance, reported an average portfolio loss of 1.33% while those reporting on March 20 reported an average loss of 8.53% (Exhibit 1a). Early reporters should show greater losses than later reporters in the next round of results since the S&P/LSTA index has rebounded since late March (Exhibit 1b). Reports closing in late March or early April will include more of the market downdraft while reports closing late in April will include more of the rebound.

Exhibit 1a: Manager returns fell through March  Exhibit 1b: The market bounced into April

Source: Bloomberg, Amherst Pierpont Securities

Manager excess returns also varied through March, generally rising with later reporting dates (Exhibit 2). The pattern suggests managers used the falling market to trade into better performers.

Exhibit 2: CLO manager excess returns rose through March

Source: Amherst Pierpont Securities

Manager excess returns in March correlate closely with cumulative excess returns from January through March but largely because of the 1-month overlap in results. Splitting excess returns into results for January through February and results for March alone shows little correlation (Exhibit 3). Performance in the generally bullish markets of the first two months did little to predict performance in the bearish third month.

Exhibit 3: Manager excess return in Jan-Feb did not predict performance in March

Source: Amherst Pierpont Securities

The list of managers adding excess return for the 30 days ending March 20 includes the following (Exhibit 4):

Exhibit 4: CLO managers adding excess return for the 30 days ending March 20

Note: Performance for managers with five or more deals tracked by APS. Performance attribution starts with calculated total return on the leveraged loan portfolio held in each CLO for the 1-month reporting period ending on the indicated date. CLOs, even with a single manager platform, may vary in reporting period. The analysis matches performance in each period to performance over the identical period in the S&P/LSTA Leveraged Loan Index. Where a deal has at least 18 months of performance history since pricing and no apparent errors in cash flow data, the analysis calculates a deal beta. The deal beta is multiplied by the index return to predict deal return attributable to broad market performance. Where no beta can be calculated, the analysis uses the average beta across each manager’s active deals weighted by the average deal principal balance over time. Any difference between performance attributable to beta and actual performance is attributed to manager alpha. Source: Amherst Pierpont Securities.

The list of managers adding excess return for the 90 days ending March 20 includes the following (Exhibit 5):

Exhibit 5: CLO managers adding excess return for the 90 days ending March 20

Note: Performance for managers with five or more deals tracked by APS. Performance attribution starts with calculated total return on the leveraged loan portfolio held in each CLO for the 1-month reporting period ending on the indicated date. CLOs, even with a single manager platform, may vary in reporting period. The analysis matches performance in each period to performance over the identical period in the S&P/LSTA Leveraged Loan Index. Where a deal has at least 18 months of performance history since pricing and no apparent errors in cash flow data, the analysis calculates a deal beta. The deal beta is multiplied by the index return to predict deal return attributable to broad market performance. Where no beta can be calculated, the analysis uses the average beta across each manager’s active deals weighted by the average deal principal balance over time. Any difference between performance attributable to beta and actual performance is attributed to manager alpha. Source: Amherst Pierpont Securities.

 

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