Anthony Clemente

Anthony Clemente, the New York based managing director of the high-yield investments group at US asset management firm Invesco, is used to building businesses. Prior to moving to Invesco in 1998. he was a co founder of one of the first mutual funds to invest in loans - Merrill Lynch's Prime Funds, now part of Merrill Lynch Investment Managers. He was there for just over eight years and oversaw its blossoming into a business with 8.5 billion of assets under management.
When he moved to Chancellor LGT Asset management - shortly before its acquisition by Invesco - he had his work cut out from the start. The CDO team had left en masse, so Clemente had to rebuild, virtually from scratch. "In addition to hiring a new team, we put new systems and processes in place. This took about a year, and we now have a reputation in the market for both high automation and a structured risk process." Clemente says. Invesco's high-yield group now has $5.6 billion of assets under management - around six times as much as when Clemente joined just four years ago.
Invesco has become collateral manager of several CDOs over the past few years - including the management of five private transactions worth a total of more than $2 billion. Most of its CDOs include a high proportion of loans relative to bonds. while two are constructed entirely from loans: Sequils Liberty (2001) worth $400 million. and Avalon Capital 2 (2000), worth $639 million.
In 2002, investors' appetite for high yield CDOs - predominantly referenced on loans - has been strong, Clemente says. "Essentially, it's a night to quality.
Investors want diversified debt products with lower volatility, and that means looking at loans," he adds.
Many institutional investors cannot access the loan market directly, but still want loans as part of their alternative asset allocation. After all. other types of alternative investment, such as private equity. are often illiquid and hedge funds can have long lock-up periods, CDOs are attractive because they are yielding assets that typically pay dividends quarterly or twice-yearly. "This can significantly reduce an investor's portfolio risk. It's a high-yielding instrument that can allow insurance companies, for example, to better match their assets and liabilities," Clemente says, Alongside insurers, financial institutions and corporates - such as commodity and energy firms that want a diversification play - form the lion's share of Invesco's client base. "Also, with equity and bond markets' poor performance, an increasing number of pension funds are looking to expand their alternative baskets," Clemente adds.
Despite the rapid growth of Invesco's high-yield portfolios. the risk processes that Clemente put in place three years ago are handling the current challenging credit environment well, he claims. Invesco's propriety portfolio management system includes extensive databases that help it monitor and track credit and market risk.
This is particularly important for loans, where public information can be scarce at best. Records for around 1,800 loans that can accumulate 2.000 data points each are included in the system. There is also a similar proprietary database including information on around 400 high-yield bonds.
In addition to this type of monitoring and analysis. Invesco also has a well developed hedging programme for its CDOs. "We currently have around 51.3 billion in derivatives under management - mostly interest rate swaps." Clemente say'. "But Invesco is sophisticated: the high-yield group uses credit-linked notes. basis swaps and sells default protection.' he adds.
Actually, Clemente's group was one of the first asset managers to get into credit derivatives. It began using total return swaps back in 1998. "We were one of the earliest players to enter the credit derivatives market. We went in at a significant level - around $700 million," Clemente says.
In terms of positions, selling protection is not that dissimilar to going into the cash market. But making ratings agencies and investors comfortable with the manager's expertise in buying protection is difficult, according to Clemente. As acceptance and use of credit derivatives grows, it's possible that Invesco will begin to enter the market on the other side of trades. "If we can design a product that explicitly explains the risk to the investor base, and they are comfortable with our ability to marginally speculate, then we will," Clemente says.
"But only when our clients think it's acceptable - it's not our place to push the market," he adds.
Despite its familiarity with credit derivatives, Invesco is not yet managing a synthetic CDO but this could change shortly. It hired staff last summer to focus on how it could better expand its presence in the structured fund market, and is aiming to close its first synthetic deal soon. Clemente declined to elaborate.
Aside from synthetics, interest and demand from investors for high-yield products will continue to be strong in 2002, Clemente claims. In challenging bond and equity markets, the absolute return that CDOs offer via their implicit credit arbitrage naturally appeals to investors wanting less performance volatility. He says: "I have never seen a period with this amount of interest in high-yield. What we need now is more deal flow.