A phrase repeated so often it sounds like a broken record - that the firm managing a CDO makes a difference in its overall performance - must be falling on deaf ears, some said, as more and more new managers set up shop. While a firm classified as "new" could be run by an experienced staff, the sheer number of them entering the market has equity investors looking for a way to gauge performance.
In 1999, there were a handful more than 100 CDO managers across the U.S. and Europe. That number ballooned to roughly 550 total managers in 2005 and 636 total managers by the end of 2006, according to Morgan Stanley research published last week. Moreover, by the end of last year, the number of unique managers with at least one CDO under their belt had grown to 343 in the U.S. and 112 in Europe.
And in the illiquid and opaque world of CDO equity, performance data is not exactly readily available. Moody's Investors Service last year began publishing CDO returns by type and vintage year - but so far, the ratings agency has opted not to publish specific deal or manager names. Moreover, as Morgan Stanley points out, the groupings for the data are not ideal. Structured finance CDOs, for example, comprise a broad array of deal types, such as multi sector CDOs, and closing dates are not listed, making the returns of some deals appear unfairly low.
But overarching trends in the divergence of annualized CDO equity distributions show that credit environments and underlying collateral are not the only determinants in performance. Being able to spot and trade out of a position at an opportune time, as in the case with defunct commodities brokerage Refco Inc., matters, Morgan Stanley wrote.
For example, roughly 5% of 2005- vintage CLO equity tranches received annualized distributions ranging from zero to 2.5%, and about 5% received distributions in the 17.5% to 20% range. As a comparison, deals that closed in 2002, a much different credit environment, distributed 12.5% to 15% and more than 30% each about 8% of the time, according to the Moody's data. And while CLO risk allocation could be consistent from manager to manager in the double-B to B arena, the extent of exposure to lower rated securities and high yielding buckets are factors that push variations in equity distribution.
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