Monthly Strategy Update: PAM Senior Loans
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 Good morning *|FNAME|*,

In August the PAM Senior Loan fund domiciled in Ireland outperformed by 26bps, by losing only 0.02% (Gross of fees in USD). The Credit Suisse Leveraged Loan benchmark lost 0.28% (Gross of fees in USD). YTD the PAM Senior Loan Fund has an outperformance of 90bps (6.84% vs 5.94%, Gross of fees in USD). 

Since inception in 2007 the PAM SL strategy's GIPS compliant track record outperforms the benchmark with 1.3% annualized, outperforming most peers with a lower standard deviation and much lower down market capture (78.95%)(eVestment as of 31-7-2019). 

After investors realised that FED rates would not increase any further the asset class has seen a long period of outflows (see graph at the right. Due to attractive yields this has reversed recently

Strong performance has brought yields on US high-yield bonds below the yield on US floating-rate loans (see chart below on the right). Since 2010 the yield on high-yield bonds has on average been 1% higher than the yield on floating-rate loans (see graph below). A logical difference given their lower position in the capital structure, interest rate risk, higher volatility and lower recovery rate after a default.

The Effective Yield on US Senior Loans currently is 6.6%. 


 

- Presentation PAM US Senior Loans

- PAM US Senior Loans versus peers

- PAM US Senior Loans Factsheet

Latest investor Compass

 

Loan Mutual fund & ETF assets under management have seen significant declines

 

 

 


 

 

US leverage Loans vs US high-yield bonds

At present the yield on US high-yield bonds is about 1% lower than the yield on US floating rate loans (a >2% difference vs the average of the last 10y). With yields now favoring floating-rate loans, investors can improve their position in the capital structure of a company, lower volatility of their portfolio by considering loans over bonds.

On the flip side the FED is likely to lower the yield on US floating rate loans and a lower FED rate might favour returns on US high-yield bonds by having a higher duration. The latter is questionable though as the 5y rate with 1.6% is  already substantially below the FED rate and thus largely priced in.

Credit selection and due diligence on each loan in the portfolio is more paramount than last years for loss avoidance and possible alpha generation now that leverage levels are more elevated. Pacific Asset Management invests in the larger more liquid loans with more collateral and has a very cautious positioning at present. With a 79% down market capture since inception in 2007 PAM has one of the lowest down market captures of all US Senior Loan managersPlease reach out for more information.

 

 

PAM invests selective in so called Broadly Syndicated Loans (BSL). These are larger more liquid Loans. As PAM is selective, they invest in 80-150 issuers. PAM also caps their maximum AUM in the strategy at 8 billion USD (4 billion today).

We have replicated this fund in an Irish vehicle investable for European investors with a management fee of just 45 bps: 
http://www.pacificfunds.com/investor/mutual-funds/fixed-income-funds/floating-rate-income.html

Smaller issue sized loans have outperformed the Broadly Syndicated Loans over the last years. In times of stress these Smaller issue sized loans are not always priced correctly and a sell can find a much lower bid than expected. PAM is comfortable not to be in this space also given the position in the cycle that we are in. It might be a smart thing to move your US Loan investment from the small and mid issue sized loans to the Broadly Syndicated more liquid area.

 

 

Performance:

YTD the PAM Senior Loan Fund has an outperformance of 90bps (6.84% vs 5.94%, Gross of fees in USD). Since inception in 2007 the PAM SL strategy's GIPS compliant track record outperforms the benchmark with 1.3% annualized, outperforming most peers with a lower standard deviation and much lower down market capture (78.95%) (eVestment as of 31-7-2019). 


Pacific Asset Management Senior Loan strategy: Superior returns, less risk and high alpha




High yield versus Loans

  • There has been a substantial narrowing valuation gap between the two asset classes.
  • The technicals supporting the loan asset class have become more favorable in recent months.
  • There is significant attractiveness, on a relative basis, to favor loans over high yield on a go forward basis.
  • On a risk-adjusted basis, one could prefer loans versus high yield.

Why Bank Loans?

  • Senior and secured
  • Competitive yield based on floating interest rates means no duration
  • Low correlation with most major asset classes
  • Low default rate due to shorter average life.
  • Higher recoveries generally than other asset classes
     
  • Loans act as an interest rate hedge

During periods of rising rates, loans have historically performed well compared to other fixed income asset classes.



Source: St. Louise Federal Reserve, Credit Suisse, Barclays, as of 12/31/2016

More about PAM  

Pacific Asset Management differentiates itself through the following Investment Approach:
Selective – Credit selection, with portfolio holdings ranging from 100 – 150 names.
Large Issuers – Bank loan facilities of somewhat larger companies, typically with an EBITDA of greater than $100 million.
LiquidNames with daily liquidity are preferred.  
Lower Volatility Through Low DefaultsSince inception, the strategy had only 2 issuer defaults.
 
Candoris and PAM have set up a vehicle for European investors with daily liquidity.

- Presentation PAM US Senior Loans

- PAM US Senior Loans versus peers
 

 

 

Max drawdown US Loans vs US HY

 

 

PAM holds typically 5 or 6 names of the top 30 most held US Loans, they always hold a portfolio that is more liquid than the benchmark and often have a lower yield. Being able to be selective and change positions/trade makes that the strategy keeps up with the benchmark in strong market environments. During weaker periods the safer more liquid portfolio outperforms and allows PAM to move out of holdings if required

Since inception in 2007 the strategy has an up market capture just over 100%, the down market capture is 79%, with a Beta of 0.88. Despite the long bull market, PAM outperforms the CS LL index with 1.3% annualized before fees, looking at risk adjusted alpha they rank top percentile (eVestment, 30-6-2019).

In recent months equities and High Yield have corrected, US Senior Loans are relative steady as can be expected from the relatively low vol asset class. Yes, covenant lite is there to stay and leverage has increased, but so have yields

Please let us know in case you like to have a broad discussion with the team in Newport beach about the asset class, outlook and PAM specific approach to investing.

 

A daily liquid alternative fund is available for European investors in Ireland. 


The PAM Senior Loan fund is one of the best performing, most liquid and price competitive strategies within the Senior Loan universe.


 Separate accounts are possible as of 50 mln USD.



PAM is selective, 80-150 issuers, AUM in Loans limited to USD 8 billion 


45 bps is the management fee charged in the Irish fund 

 

 

 

 

PAM Senior Loans Composite data                                               PAM Senior Loans Fund Facts

Alpha

1.65

 

 

 

ISIN

IE00BMQX0X92

Beta

0.88

 

 

 

Benchmark

CS Leveraged Loan

Std Dev

6.46

 

 

 

Currency

USD

UMC

101.26

 

 

 

 

 

DMC

78.95

 

 

 

Asset Class

Fixed Income

Information Ratio

0.54

 

 

 

Type

Senior Loans

Tracking Error

2.37

 

 

 

Region

United States

Sharpe Ratio

0.73

 

 

 

Dividend policy

Accumulating

 

Data as of 31-7-2019 source eVestment

 

Why Pacific Asset Management (PAM)?

The strategy of PAM outperforms most of its peers since inception in 2007 with a much lower standard deviation and downmarket capture. PAM believes that their size and flexibility allows them to be well positioned. An Irish investment vehicle with US$ and Euro hedges shares is available for European investors. The Senior Loan Strategy of PAM has a 10+ year track record with an annualised outperformance over the benchmark (CSLL) of about 1.3%. 

 

PAM has a much lower Downside Market Capture

 

 

 

Links to updated presentation and other documentation

Click to receive the information

- Presentation PAM US Senior Loans

- PAM US Senior Loans versus peers

- PAM US Senior Loans Factsheet

 

 

More about PAM
Pacific Asset Management differentiates itself through the following Investment Approach:

 
Selective – Credit selection, with portfolio holdings ranging from 80 – 150 names.
Large Issuers – Bank loan facilities of somewhat larger companies, typically with an EBITDA of greater than $100 million.
LiquidNames with daily liquidity are preferred.  
Lower Volatility Through Low DefaultsSince inception, the strategy had only 2 issuer defaults.
 
Pacific Asset Management manages Senior Loans as of January 2007 and has outperformed most of its peers since inception (eVestment) with a lower volatility. Managing (only) ~US$ 3.3 billion (30-6-2019) in Senior Loans allows them more freedom than many competitors to be selective and implement the calls of analysts. This pays off during corrections in the market (lower down market capture).

Candoris and PAM have set up a vehicle for European investors with daily liquidity.

 

 

 

 

* Performances are annualised. The latest data is still preliminary. Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate.. "This email is intended to be reviewed by only the intended recipient and may contain information that is privileged and/or confidential. If you are not the intended recipient, you are hereby notified that any review, use, dissemination, disclosure or copying of this email and its attachments, if any, is strictly prohibited. If you have received this email in error, please immediately notify the sender by return email and delete this email from your system."
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