By the Numbers
CLO managers sharpen returns through September
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
CLO managers have finally started pulling ahead of the investment returns in the broad leveraged loan market after trailing through most of the pandemic. After adjusting for risk, the average manager tracked by Amherst Pierpont for the three months ending in September topped the S&P/LSTA Total Return Index by 5 bp. It is the strongest manager performance since March 2020 and comes as leveraged loan prices have stabilized and carry has become a bigger part of returns.
After accounting for managers’ reporting dates, the S&P/LSTA Total Return Index posted returns of 85 bp for the three months ending in September. The average loan portfolio for managers with five or more actively tracked deals had a beta to the index of 1.03, reflecting slightly more risk than the index itself. With that beta, the average portfolio should have gained 88 bp. Since the average portfolio instead gained 93 bp, it delivered 5 bp of excess return.
The excess return posted by individual managers ranged from 55 bp at the high end to -20 bp at the low end. Of the 72 managers tracked, 49 or 68% posted positive excess return. Individual manager betas ranged from 1.25 at the high end to 0.89 at the low end, reflecting wide differences across managers in the amount of risk taken from deal to deal and over time.
The relatively strong excess returns follow a stretch from March 2020 through June 2021 where the average CLO manager underperformed the broad market. As loans rebounded from the onset of pandemic, returns became highly correlated and left little room for managers to add value through loan selection and other means. With loan prices stabilizing, loan returns have become more differentiated, and managers have had more opportunity to add value.
Excess return ultimately flows to CLO equity either as excess interest during and after the reinvestment period or as accumulated price or trading returns realized at liquidation. Portfolio beta matters for both equity and debt, reflecting the relative volatility of portfolio value. The more volatile a portfolio, the higher the required debt and equity return.
For the three months ending in September, Shenkman, Marathon, ICG, HPS and Halcyon led all larger managers with the highest excess returns. A list of all other managers with positive excess returns is below (Exhibit 1).
Exhibit 1: CLO managers with positive excess returns for the three months through September
Note: Performance for managers with five or more deals tracked by APS. Performance attribution starts with calculated total return on the leveraged loan portfolio held in each CLO for the 3-month reporting period ending on the indicated date. CLOs, even with a single manager platform, may vary in reporting period. The analysis matches performance in each period to performance over the identical period in the S&P/LSTA Leveraged Loan Index. Where a deal has at least 18 months of performance history since pricing and no apparent errors in cash flow data, the analysis calculates a deal beta. The deal beta is multiplied by the index return to predict deal return attributable to broad market performance. Where no beta can be calculated, the analysis uses the average beta across manager deals weighted by the average deal principal balance over time. Any difference between performance attributable to beta and actual performance is attributed to manager alpha.
Source: Amherst Pierpont Securities.
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