While some CDO managers appear to be doing a better job than others, investors have yet to demand a higher yield for a history of lackluster or poor performance, according to Standard and Poor's. By borrowing performance metrics most familiar to the bond world, the rating agency created a custom ABS benchmark and was able to find enough discrepancy in CDO performance to rank 25 collateral managers. However, the analysts emphasized that the results rank against only one benchmark, and are by no means comprehensive.
Even so, at least one ABS CDO manager is interested in using its S&P ranking - which at this point remains proprietary - as a selling point to potential investors, said S&P analyst John O'Brien. He said between 12 and 15 managers have contacted the rating agencies inquiring about obtaining a ranking as well. On a conference call held last week on the matter, an MBIA representative inquired about the identity of the top five managers, and a Radian Assurance Guaranty representative asked about the performance of first-time asset managers.
"While everybody talks about manager tiering, it is very difficult to come up with the measures to do that," said S&P analyst Vandana Sharma during the call. "In this world of managers coming into the market every day, investors have even more of a task differentiating, but we think this is something investors should focus on."
S&P is not releasing the names of the 25 collateral managers it ranked because analysts are currently developing a series of benchmarks in order to get a better look at CDO manager performance. The rating agency began the project last November with 33 portfolios but is now tracking at least 100 that are managed by 50 to 75 managers, O'Brien said. The report will eventually be released semiannually, and over the next six months its analysis will begin encompassing CDO managers across all asset classes, he added.
Ten managers - the so-called top tier - were able to match or outperform the ABS market index and custom benchmark, consisting of the specific mix of collateral they managed last year. Five managers underperformed both of those benchmarks. Overall, S&P found that ABS CDO managers generally outperformed the ABS market in both sector and security selection. Roughly 60% of collateral managers outperformed their custom ABS benchmarks, and more than 70% fared better than the average ABS portfolio during the year.
To create its custom benchmark, S&P compared the collateral rating performance of 100 transactions with a CDO of ABS market-index benchmark, comprised of a hypothetical portfolio of the same percentages and average ratings of the aggregate collateral within those 100 deals since the beginning of last year. To judge performance, the average rating change in 2004 of the hypothetical portfolio was compared to the weighted average rating change in the collateral of each of the 100 CDOs.
The data showed that the performance distribution among the asset managers was clustered fairly close to one another. "The surprising thing to me was that it was very hard to find the clear, home-run hitters, and no one manger could consistently beat their benchmarks," added Sharma. The problem with developing an absolute ranking system is that the market's complexity creates a backstop of rather squirrelly data. For example, more experienced asset managers may not fair as well because of the highly diversified older-vintage deals that included manufactured housing or aircraft lease ABS. Likewise, a new manager could only have a history that consists of much newer vintages, therefore allowing their performance data to surf along the current credit cycle, wherein newer vintage ABS is largely performing with a low incidence of default.
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