Managers holding riskier loans led the pack through July
admin | August 7, 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.
Nearly 70% of CLO managers with five or more active deals outperformed the broad market between May and July. The average CLO leveraged loan portfolio gained 8.8% and, after adjusting for broad market exposure, or beta, outperformed the market by 0.3%. Managers who carried portfolios with less liquid loans and had better long-run track records at the end of April delivered more recent excess returns than their peers. Amid the favorable loan rally between May and July, managers holding riskier loans led the pack.
Loan returns rose steadily between May and July (Exhibit 1). The index has now reached about 98% of its pre-coronavirus level. After accounting for the various reporting dates of managers, the S&P/LSTA Index gained 8.2% between May and July. Managers held portfolios with an average beta of 1.03, which meant the average manager should have gained 8.5%. With the actual average performance at 8.8%, the average manager outperformed the index by 0.3%.
Exhibit 1: Loan returns have recovered 98% of its pre-Covid level
Source: Bloomberg, Amherst Pierpont Securities
Nearly 70% of the managers led the index, a significant uptick from the figures reported by Amherst Pierpont last month (Exhibit 2). Out of the 69 managers tracked for July, eight delivered alpha greater than 1%, while only one trailed the index by at least 1%.
Exhibit 2: Nearly 70% of the managers outperformed the index between May and July
Note: data shows excess return only for active deals. Source: Amherst Pierpont Securities.
The bid depth and weighted average spread of the portfolios and the manager track record of consistently delivering alpha correlated most strongly with recent excess returns (Exhibit 3). Managers who held loans that are less liquid or have higher spread delivered more excess returns. Additionally, higher exposure to ‘Caa1’ correlated with more recent excess returns. These relationships indicate that managers holding riskier or less liquid loans tended to outperform between May and July.
Exhibit 3: 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 April through June only on active deals. Portfolio attributes measured as percentiles. Source: Amherst Pierpont Securities.
Weighted average facility size, a proxy measure for portfolio bid depth, also suggests that illiquidity led to higher recent excess returns. An earlier APS analysis reveals that facility size and bid depth go hand in hand as measures of the liquidity of a loan, and consequently of a loan portfolio. In theory, an illiquidity premium corresponds to the liquidity risk, which can help explain the positive correspondence between illiquidity and excess returns between May and July.
The following managers delivered positive alpha in the market between May and July (Exhibit 4). Angelo, ICG, and Golub top the chart this time. The other alpha leaders include Anchorage, American Money, Sound Point, THL, GSO, and Marathon.
Exhibit 4: Alpha leaders in CLO portfolio performance May-July 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.
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