By the Numbers

Manager returns edge closer to market through March

Caroline Chen | April 8, 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.

Returns in the average CLO loan portfolio continued to trail the broad loan market for the three months ending in March. After adjusting for risk, the average manager tracked by Amherst Pierpont lost to the S&P/LSTA Total Return Index by 3 bp. This is the fourth consecutive month that managers’ excess return trailed the index. However, March performance improved by 2 bp from the month before.

After accounting for managers’ reporting dates, the S&P/LSTA Total Return Index posted returns of -42 bp for the three monthly reporting periods ending in March. The average loan portfolio for managers with five or more actively tracked deals had a beta to the index of 1.02, reflecting slightly more risk than the index itself although down from a beta of 1.03 earlier this year. With that beta, the average portfolio should have returned -43 bp. Since the average portfolio instead lost 46 bp, it ended up with a rounded 3 bp loss.

The excess return posted by individual managers over the past three months ranged from 41 bp at the high end to -29 bp at the low end, slightly narrower than the 25 bp to -47 bp range a month ago. Of the 75 managers tracked, only 20

or 26.7% posted positive excess return, flat compared to the numbers in February but down from 37% in January. Individual manager beta ranged from 1.29 at the high end to 0.86 at the low end, reflecting wide differences across managers in the amount of risk taken from deal to deal and over time.

Managers underperformed, but there is a silver lining

Leveraged loan prices had a big swing in March. The average loan hit a year-to-date low of $95.88 on March 15 before rebounding to $97.60 at quarter end. The negative momentum among CLO managers showed most managers were not immune to heightened market volatility, but there is a silver lining in performance data. Of the 55 managers who posted negative excess returns in March, the weighted average of -11 bp for the three-month performance is a 2 bp improvement from the levels in February. The remaining 20 managers who posted positive excess return had a weighted average of 16 bp for the 3-month performance. This is 8 bp improvement from the return posted by managers with positive returns in February. Overall, March performance reduced the negative return by 2 bp from a month ago (Exhibit 1).

Exhibit 1. Historical manager excess return after adjusting for risk.

Note: The data shows the average excess return relative to the S&P/LSTA Total Return Index for 75 managers with five or more active deals. The data cover performance for the three monthly reporting periods ending on or before March 22, 2022.
Source: Intex, Markit, Amherst Pierpont Securities

Lost loan price advantage with rising power of weighted average loan spread

Managers with a higher weighted average price on loans had generated better excess returns in the past, but the relation evaporated in the latest market volatility. By contrast, WAS showed a correlation of 0.45 with excess return, a big jump from prior two months levels, and bid depth shows a stronger negative correlation (Exhibit 2). Higher spread and lower liquidity tended to coincide with better excess return, suggesting illiquid assets performed well.

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 75 managers through March.
Source: Intex, Markit, Amherst Pierpont Securities.

When compared the loan attributes from managers delivered positive and negative excess returns, it is clear managers who took risk were rewarded despite the softness seen in loan prices (Exhibit 3).

Exhibit 3: CLO managers with high-risk loan profile delivered better return in Mar

Source: Intex, Markit, Amherst Pierpont Securities.

With mounting geopolitical risk in broad credit market, volatility in loan prices looks unlikely to recede in the near future.

Low beta managers advantage diminished in March

Corresponding to what we observed in loan attributes, low beta managers performance advantage also diminished in March. 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. In February, the return difference between CLO managers with beta less than 1 and those greater than 1 was 9 bp. The gap was reduced to 2 bp in March. And regardless of beta, both groups had returns in negative territory (Exhibit 4).

Exhibit 4: The beta difference is less palpable

For the three months ending in March, CBAM, Fortress, ZAIS, CSAM and Golub Capital 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 5). A complete list of managers and their recent returns is here.

Exhibit 5: CLO manager performance for the three months ending March

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

Exhibit 6: 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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