By the Numbers
CLO managers winning streak ends in December
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. This material does not constitute research.
CLO managers fell behind the investment returns of the broad leveraged loan market for the three months ending in December, closing out a series of wins that started in the second half of 2021. After adjusting for risk, the average manager tracked by Amherst Pierpont lost to the S&P/LSTA Total Return Index by 1 bp. The average manager matched index returns through December but with a portfolio carrying slightly more risk, leading to the risk-adjusted loss.
After accounting for managers’ reporting dates, the S&P/LSTA Total Return Index posted returns of 77 bp for the three months ending in December. 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 nearly 79 bp. Since the average portfolio instead gained 77 bp, it ended up with a rounded 1 bp loss.
The excess return posted by individual managers over the three months ranged from 48 bp at the high end to -53 bp at the low end, a range that has widened over the last several months. Of the 72 managers tracked, only 25 or 35% posted positive excess return. Individual manager betas ranged from 1.26 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 outpaced the S&P/LSTA Total Return Index starting in 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. In December, the average portfolio fell behind.
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: 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 December, Carlyle, Fortress, Morgan Stanley, Angelo Gordon and Shenkman 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 December
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: Amherst Pierpont Securities.
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