Risk takers lead again through October
admin | November 6, 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 three quarters of CLO managers with five or more active deals outperformed the broad loan market between August and October. The average CLO leveraged loan portfolio gained 3.63% and, after adjusting for broad market exposure, or beta, surpassed the market by 0.17%. Managers who held loan portfolios with wider spreads or more ‘Caa1’ exposure at the end of August led the pack.
Loan returns rose steadily between August and mid-September, before plateauing into early November (Exhibit 1). The index has now remained near its pre-coronavirus level. After accounting for the various reporting dates of managers, the S&P/LSTA Index gained 3.63% between July and September. Managers held portfolios with an average beta of 1.04, which meant the average manager should have gained 3.77%. With the actual average performance at 3.94%, the average manager outperformed the index by 0.17%.
Exhibit 1: Loan returns stayed flat through October
Source: Bloomberg, Amherst Pierpont Securities
About 74% of the managers led the index, an uptick from the figures reported by Amherst Pierpont last month (Exhibit 2). Out of the 69 managers tracked from August through October, 17 delivered alpha greater than 50 bp while three trailed the index by at least 50 bp.
Exhibit 2: Three quarters of the managers outperformed the index between August and October
Note: data shows excess return only for active deals.
Source: Amherst Pierpont Securities.
The weighted average spread and ‘Caa1’ exposure of the portfolio correlated most strongly with recent excess returns (Exhibit 3). Managers who held loans that have wider spreads or received ratings ‘Caa1’ or below delivered higher returns. A higher weighted average rating factor also correlated positively with more recent excess returns. Managers that held more liquid loans or loans with higher average prices tended to see lower excess returns. These relationships indicate that managers holding riskier loans continued to outperform between August and October.
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 August through October only on active deals. Portfolio attributes measured as percentiles.
Source: Amherst Pierpont Securities.
A total of 36 managers delivered positive alpha in the market between August and October (Exhibit 4). Marathon, Marble Point, and ArrowMark top the chart this time. Jeffries and Golub round out the Top 5.
Exhibit 4: Alpha leaders in CLO portfolio performance August-October 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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