The Big Idea
CLO managers edge out the index through November
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 edged out the investment returns of the broad leveraged loan market for the three months ending in November, notching another in a series of wins that started in the second half of this year. After adjusting for risk, the average manager tracked by Amherst Pierpont topped the S&P/LSTA Total Return Index by 2 bp. But manager advantage has narrowed in recent months as pricing on the largest leveraged loans has dropped against the broader market.
After accounting for managers’ reporting dates, the S&P/LSTA Total Return Index posted returns of 143 bp for the three months ending in November. 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 148 bp. Since the average portfolio instead gained 150 bp, it delivered 2 bp of excess return.
The excess return posted by individual managers ranged from 42 bp at the high end to -41 bp at the low end, a wider range than last month. Of the 70 managers tracked, only 30 or 43% 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.
Manager advantage fades with pricing on larger loans
After trailing badly early in the year, gross portfolio returns for the average manager have outpaced the S&P/LSTA Total Return Index since early summer. The average manager started the year trailing the index by 10 bp, caught up by July and pulled ahead by 7 bp by October (Exhibit 1). As the 3-month performance window slid into November, the lead dropped to 2 bp.
Exhibit 1: Managers trailed the market early in the year but beat the market later
Note: The data shows the average excess return relative to the S&P/LSTA Total Return Index for managers tracked by Amherst Pierpont.
Source: Intex, Markit, Amherst Pierpont Securities
Managers closed the gap to the market as loan prices broadly rose in the first half of the year and pulled ahead as prices broadly plateaued after June (Exhibit 2). Notably, prices on the largest leveraged loans have generally fallen in the second half of the year while prices on the broad index have trended sideways. Portfolios that overallocated to the largest and most liquid loans consequently may have underperformed the index.
Exhibit 2: Pricing in the largest loans has steadily softened to the broad market
Note: The S&P/LSTA 100 price series shows a large jump from 10 Jun 2021 to 11 Jun 2021 due to the restructuring of a discount loan to Seadrill Partners and replacement of that loan in the index by a loan to United Airlines, the next largest loan in the market.
Source: Bloomberg, LCD, Amherst Pierpont Securities.
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 November, Angelo Gordon, Fortress, Morgan Stanley, Shenkman and Allstate led all larger managers with the highest excess returns. A list of all other managers and their level of excess returns is below (Exhibit 3).
Exhibit 3: CLO manager performance for the three months ending November
Note: Performance for managers with five or more deals issued since January 1, 2011, and 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: Intex, Markit, Amherst Pierpont Securities.
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