By the Numbers

The third time is not a charm

Steven Abrahams and Caroline Chen | March 11, 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 further behind the investment returns of the broad leveraged loan market for the three months ending in February. After adjusting for risk, the average manager tracked by Amherst Pierpont lost to the S&P/LSTA Total Return Index by 5 bp. The average manager beat index returns through most of the second half of last year before stumbling in December and January and again last month.

After accounting for managers’ reporting dates, the S&P/LSTA Total Return Index posted returns of 83 bp for the three monthly reporting periods ending in February. 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 88 bp. Since the average portfolio instead gained slightly more than 83 bp, it ended up with a rounded 5 bp loss.

The excess return posted by individual managers over the past three months ranged from 25 bp at the high end to -47 bp at the low end, narrower than the 41 bp to -44 bp range a month ago. Of the 72 managers tracked, only 19

or 26.4% posted positive excess return, down from 37% in January. Individual manager betas ranged from 1.29 at the high end to 0.88 at the low end, reflecting wide differences across managers in the amount of risk taken from deal to deal and over time.

Manager performances have lost streak after adjusting for risk

Manager performance outpaced the S&P/LSTA total return index in most of the second half of last year. The trend reversed as the market entered a volatile 2022. Of the 72 managers tracked, 53 managers posted negative excess returns with a weighted average of -13 bp for the three-month performance ended in February. Although the remaining 19 managers delivered positive weighted average 8 bp excess return, the average manager performance again landed in negative territory.

Exhibit 1. Historical manager excess return to the market index 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 on or before Feb 20, 2022.
Source: Intex, Markit, Amherst Pierpont Securities

Diminishing loan price advantage over other loan attributes

Managers with a higher weighted average price on loans continue to generate better excess returns in February, but the correlation between price and excess return at 0.41 is a notch lower than the reported level in January. By contrast, WARF showed a correlation of 0.27 and WAS showed a correlation of 0.18 with excess return, both improved from last month levels (Exhibit 2). The small differences are not statistically significant.

Exhibit 2: Correlation between loan attributes and risk adjusted 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 February.
Source: Intex, Markit, Amherst Pierpont Securities.

The advantage of holding loans closer to par likely came from their higher coupons. Market volatility may have reduced the advantage of holding coupons closer to par. With the mounting geopolitical risk and market uncertainties, the average loan price in the S&P/LSTA index dropped to $97.88 at the end of February from $98.69 a month ago. The index average price ranged between $98 and $99 before Russian invasion but touched a new low of $97.08 on March 8.

Low beta managers delivered better excess return

Portfolio beta is a measure reflecting the volatility of portfolio returns compared to the market index. In general, the more volatile a loan portfolio, the higher the required debt and equity return. But higher return does not necessarily mean excess return after adjusting for risk. Of the 72 CLO managers tracked, 48 or 67% had a beta greater than 1, indicating an overall riskier portfolio compared to the index. After adjusting for risk, the weighted average excess return of the 48 high beta managers underperformed the S&P/LSTA index by 8 bp. For managers with a portfolio beta less than 1, their performance was mostly in line with the index (Exhibit 3).

Exhibit 3: The beta makes the difference

For the three months ending in February, Fortress, Carlyle, Anchorage, NY Life and CSAM 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 4). A complete list of managers and their recent returns is here.

Exhibit 4: CLO manager performance for the three months ending February

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 5) and to data on more than 140 managers and more than 1,000 active deals is here.

Exhibit 5: Amherst Pierpont CLO manager bubble chart

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

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.