By the Numbers

CLO managers lag the market again in January

Steven Abrahams and Caroline Chen | February 25, 2022

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 fell behind the investment returns of the broad leveraged loan market for the three months ending in January, losing ground for the second straight month. After adjusting for risk, the average manager tracked by Amherst Pierpont lost to the S&P/LSTA Total Return Index by 3 bp. The average manager beat index returns through most of the second half of last year before stumbling in December and again in January.

After accounting for managers’ reporting dates, the S&P/LSTA Total Return Index posted returns of 94 bp for the three monthly reporting periods ending in January. 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 more than 96 bp. Since the average portfolio instead gained slightly more than 93 bp, it ended up with a rounded 3 bp loss.

The excess return posted by individual managers over the three months ranged from 41 bp at the high end to -44 bp at the low end, a narrower range than the month before. Of the 73 managers tracked, only 27 or 37% posted positive excess return. Individual manager betas ranged from 1.30 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.

Advantage in loans closer to par

Managers with a higher weighted average price on loans tended to generate better excess returns. Price showed a correlation of 0.53 with excess return, significantly higher than correlations with weighted average rating factor, spread, diversity score or bid depth (Exhibit 1).

Exhibit 1: Managers with loans closer to par tended to deliver more excess return

Note: Data shows correlation of each measure, calculated across each manager’s outstanding deals, with excess return or alpha as measured for 72 managers through January.
Source: Intex, Markit, Amherst Pierpont Securities.

The advantage of holding loans closer to par likely came from their higher coupons. The average price of a loan in the S&P/LSTA index from November through January broadly ranged between $98 and $99, With limited price volatility, income played a bigger role in returns, and higher absolute coupons generated more income.

Manager advantage fades

After trailing badly early last 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 2). As the 3-month performance window slid into November, the lead dropped to 2 bp. In December, the average portfolio fell behind by 1 bp before trailing last month by 3 bp

Exhibit 2: Managers lately have fallen behind the market after adjusting for risk

Note: The data shows the average excess return relative to the S&P/LSTA Total Return Index for 72 managers with five or more active deals. The data cover performance for the three monthly reporting periods ending before January 20, 2022.
Source: Intex, Markit, 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 January, Carlyle, Morgan Stanley, Angelo Gordon, Anchorage and KKR led all larger managers with the highest excess returns. A list of all other larger managers and their level of excess returns is below (Exhibit 3). A complete list of managers and their recent returns is here.

Exhibit 3: CLO manager performance for the three months ending January

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.

A link to Amherst Pierpont’s latest CLO manager bubble chart (Exhibit 4) and to data on more than 140 managers and more than 1,000 active deals is here.

Exhibit 4: Amherst Pierpont CLO manager bubble chart

Note: The size of each bubble reflects manager long-term beta.
Source: Intex, Markit, Amherst Pierpont Securities

Steven Abrahams
steven.abrahams@santander.us
1 (646) 776-7864

Caroline Chen
caroline.chen@santander.us
1 (646) 776-7809

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