Risk takers continued to excel through August
admin | September 11, 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 with five or more active deals beat the broad loan market between June and August. The average CLO leveraged loan portfolio gained 6.81% and, after adjusting for broad market exposure, or beta, outperformed the market by 0.28%. Managers who carried portfolios with less liquid or lower priced loans at the end of May delivered more recent excess returns than their peers. As leveraged loans rallied between June and August, the weakest credits came back faster than average and managers with riskier portfolios stayed ahead.
Loan returns rose steadily between June and August (Exhibit 1). The index has now reached about its pre-coronavirus level. After accounting for the various reporting dates of managers, the S&P/LSTA Index gained 6.3% between June and August. Managers held portfolios with an average beta of 1.04, which meant the average manager should have gained 6.53%. With the actual average performance at 6.81%, the average manager outperformed the index by 0.28%.
Exhibit 1: Loan returns have recovered from its pre-Covid level
Source: Bloomberg, Amherst Pierpont Securities
About 55% of the managers outperformed the index, a small drop from the figures reported by Amherst Pierpont last month (Exhibit 2). Out of the 69 managers tracked for July, seven delivered alpha greater than 1%, while only one trailed the index by more than 1%.
Exhibit 2: More than half of the managers outperformed the index between June and August
Note: data shows excess return only for active deals. Source: Amherst Pierpont Securities.
The weighted average price and bid depth of the portfolio correlated most strongly with recent excess returns (Exhibit 3). Managers who held loans that are priced lower or less liquid delivered higher 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 June and August.
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 June through August only on active deals. Portfolio attributes measured as percentiles. Source: Amherst Pierpont Securities.
The percentage of CLO debt classes put on CreditWatch Negative at the end of May also correlated strongly with recent excess returns. Loans with lower ratings or other indicators of weaker credit tend to have a higher market beta and went on CreditWatch Negative with a higher frequency (Exhibit 4). For instance, lower priced loans helped explain both the dispersion in CreditWatch Negative actions, according to an earlier APS analysis, and broad market exposure. As the loan market strengthened between June and August, riskier managers benefited more from this rally.
Exhibit 4: Portfolios with higher beta also tended to go on CreditWatch Negative
Source: Amherst Pierpont Securities
The following managers delivered positive alpha in the market between June and August (Exhibit 5). Highland Capital, Marathon, and AXA Investment top the chart this time. The other alpha leaders include ZAIS Group, Steele Creek, American Money, Golub, and Anchorage.
Exhibit 5: Alpha leaders in CLO portfolio performance June-August 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.
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.
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.