Uncategorized

A rebound in manager performance through May

admin | June 5, 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.

More than half of CLO managers outperformed the broad leveraged loan market in the three months ending in May. The average CLO leveraged loan portfolio lost 9.59% and, after adjusting for broad market exposure, or beta, still underperformed the market by 0.04%. Managers with strong track records, better loans and good liquidity at the end of February delivered more excess return than their peers through the volatile months of March, April and May. Palmer Square came out on top with excess returns over the index of 1.38%.

Loan returns plunged in March but rose sharply in April and continued to rise in May (Exhibit 1). After accounting for the various reporting dates of managers, the S&P/LSTA Index lost 9.37% between March and May. These managers held portfolios with an average beta of 1.02, which meant the average manager should have lost 9.56%. With the actual average performance at -9.59%, the average manager underperformed the index by 0.4%.

Exhibit 1: Loan returns plummeted in March but bounced back in April and May

Source: Bloomberg, Amherst Pierpont Securities

Secondary market volatility in leveraged loans—as measured by the standard deviation of daily returns on the S&P/LSTA index—spiked between March and May (Exhibit 2). At the peak, the rolling 30-day volatility reached more than 10 times higher than the average volatility before March. Although the market volatility has retreated since the peak, it remained elevated in May.

Exhibit 2: 30-day volatility spiked between March and May

Source: Bloomberg, Amherst Pierpont Securities

More than half of the 66 managers with at least five active deals tracked by APS led the index, a significant uptick from the figures reported by APS last month where only 23% of the managers led (Exhibit 3). The other half of managers lagged the index significantly, however. More than 15% of the managers trailed the index by at least 1% while only 4% of managers came ahead of the index by more than 1%.

Exhibit 3: Half of the managers outperformed the index between March and May

Note: data shows excess return only for active deals. Source: Amherst Pierpont Securities.

The credit quality and tail risk of managers portfolios coming into the spring had clear impact on recent excess returns (Exhibit 4). Managers with highly priced loans and low exposure to ‘CCC’ loans delivered more excess return on average. Managers who had a history of consistently producing excess returns—measured by their information ratio—also tended to do better in recent months. Finally, liquidity as gauged by the average portfolio bid depth, helped managers adapt to the volatile market conditions.

Exhibit 4: Correlation of portfolio or manager features with recent excess return

Note: data shows the correlation of manager or loan portfolio attribute with managers’ excess return or alpha from March through May only on active deals. Portfolio attributes measured as percentiles. Source: Amherst Pierpont Securities.

The following managers delivered positive alphas despite the tough environment between March and May (Exhibit 5). Palmer Square ranked in the top five according to APS reports since March and was a clear winner this time. The others in the Top 5 include York, Triumph, Goldentree and Napier Park..

Exhibit 5: Alpha leaders in CLO portfolio performance March-May 2020

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 3-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.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

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.

Important Disclaimers

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.