Perception vs Performance – Which One Matters More?
What factors can play an important role in the pricing of primary CLO liabilities?
The list of factors is potentially very long, but please see several of them below:
- Size of managers as measured by leveraged loan AUM
- Size of the CLO management team
- Equity-friendly or debt-friendly perception
- Portfolio WARF (higher quality because it is low?)
- Portfolio weighted average spread (conservative portfolio because the WAS is tight?)
A recent study conducted by CLO Research reveals that US CLO managers with very similar investment performance as measured by their MV alpha (i.e. MV annualised return relative to the loan index’s MV return) could have a very different WACC (based on discount margins).
As we all know, it usually takes a bit of time for one to change one’s perception of certain CLO managers. Some CLO managers underperform relative to the index – but they still get premium prints, while others consistently outperform the market and yet they get average or even below-average WACC prints.
CLOs are managed vehicles, so it might be a good idea for investors to try focus more on the credit skills and investment performance of managers over a period of time.
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