Structured Products and Related Credit Derivatives: A Comprehensive Guide for Investors

CHAPTER 12

CDO Performance

Steven Todd, Ph.D.

CDO Analyst

Wachovia Capital Markets, LLC

Brian McManus

Senior CDO Analyst

Wachovia Capital Markets, LLC

Anik Ray

Associate CDO Analyst

Wachovia Capital Markets, LLC

Dave Preston, CFA

Associate CDO Analyst

Wachovia Capital Markets, LLC

Investors in collateralized debt obligations (CDOs) routinely ask research analysts to evaluate asset managers. However, it is difficult for any Wall Street analyst to produce a comprehensive report on asset managers. Analysts generally have limited access to data on CDO issues that were not underwritten in-house. In fact, investors themselves often have more complete return data, albeit manager supplied and therefore subject to spin.

Even if comprehensive data were available, there would be little consensus on how managers should be ranked. Note holders view manager performance very differently than do equity investors. Moreover, managers' track records are subject to a vintage bias. Managers who entered the market in 2003 probably have fewer problems with downgrades or poor equity cash flows than do those who began before 1999. Yet these later-entry managers often lack the experience of more seasoned ones who have survived one of the worst periods of credit defaults in history.

This chapter aims to examine the issue of how CDO managers can be evaluated. Along the way, we provide investors a toolkit to appraise CDOs as potential or current investments. We examine some of the challenges in comparing managers, ...