“Common sense is the collection of prejudices acquired by age eighteen.” – Albert Einstein
US CLO Managers: WARF and Volatility of Alpha
A sample of 270 US CLO deals (closed between 2016 and 2018) is included in this study.
In this context, the volatility of alpha is defined as the average alpha metric for the second quarter of 2020. WARF is based on the average calculated WARF of deals managed by the same manager as of Jan 2020.
The graph below shows a list of managers whose alpha performance was strong – registering higher than -0.2% on average for the period Apr-Jun 2020, as well as their average WARF as of Jan 2020.
In other words, these managers could be seen as running a less risky strategy given that they registered above-average investment performance in the time following the loan market crash of late Mar 2020. Their WARF metrics ranged from 2,684 to 3,223, with an average of 2,864 for Jan 2020.
Given the wide range of WARF, it appears that reported WARF is perhaps less helpful in measuring the risk profile of US CLO underlying collateral pools.
However, the credit management of a manager does not stop at managing for a quarter or two. Some managers have done well consistently since the onset of the pandemic, while others saw their performance falter despite registering resilience, especially in the second quarter of 2020.
To arrive at the total alpha, the total investment return for the whole period (from a deal’s closing date to the last trustee report date) is first calculated. The total portfolio return is then annualised, and the excess return over the index’s return is the total alpha depicted here.
More details can be found in the individual CLO manager reports.
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The information, research, data, research-related opinions, observations, and estimates contained in this document have been compiled or arrived at by CLO Research Group, based upon sources believed to be reliable and accurate, and in good faith, but in each case without further investigation. None of CLO Research Group or its service providers; authorised personnel, or their directors make any expressed or implied presentation or warranty, nor do any of such persons accept any responsibility or liability as to the accuracy, timeliness, completeness, or correctness of such sources and the information, research, data, research related opinions, observations and estimates contained in this document. All information, research, data, research-related opinions, observations, and estimates in this document are in draft form as of the date of this document and remain subject to change and amendment without notice. Neither CLO Research Group nor any of their third-party providers shall be subject to any damages or liability for any errors, omissions, incompleteness, or incorrectness of this document. This article is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell securities and shall not be relied upon as a promise or representation regarding the historical or current position or performance of any of the deals or issues mentioned in it.