By the Numbers

The third time is not a charm

| 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

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

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