By the Numbers

CLO managers beat the market through April

| May 6, 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.

The average CLO loan portfolio beat returns in the broad loan market for the three months ending in April. After adjusting for risk, the average manager tracked by Amherst Pierpont outperformed the S&P/LSTA Total Return Index by nearly 2 bp. This is the first month in the year that managers’ excess return topped the index, and April excess returns improved by 5 bp from the month before, the largest month-over-month change so far this year.

After accounting for managers’ reporting dates, the S&P/LSTA Total Return Index posted returns of 2 bp for the three-monthly reporting periods ending in April. 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 the latest beta, the average portfolio should have passively returned 2.4 bp. Since the average portfolio instead delivered 4 bp, it ended up with a rounded 2 bp excess return.

The excess return posted by individual managers over the past three months ranged from 30 bp at the high end to -61 bp at the low end, wider than the 41 bp to -29 bp range a month ago. Of the 75 managers tracked, 34 or 45% posted positive excess return, the highest in the first four months of the year. Individual manager beta ranged from 1.28 at the high end to 0.87 at the low end, reflecting wide differences across managers in the amount of risk taken from a deal to deal and over time.

Overall, April’s performance improved by 5 bp from a month ago, and the first time in this year landed in positive territory (Exhibit 1).

Exhibit 1. Historical manager excess return has turned positive

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 April 20, 2022.
Source: Intex, Markit, Amherst Pierpont Securities

Low beta managers outperformed again

Managers with low beta continued to outperform (Exhibit 2). Portfolio beta is a measure reflecting the volatility of portfolio returns compared to the market index.  In March, the return difference between CLO managers with a beta less than 1 and those greater than 1 was 2 bp and the returns of both groups landed in negative territory.  The difference was 5 bp in April. Low beta managers had a 7 bp swing in performance compared high beta managers’ 4 bp swing.

Exhibit 2: Low beta managers continue to post better excess return

Source: Amherst Pierpont Securities

Quality and spread contribute to excess return through April

Performance through March rewarded managers whose portfolios had high weighted average spread and lower bid depth, but the relationship no longer held through April.  The correlation between the weighted average loan price and excess returns increased to 0.43 in April from -0.19 a month ago. In general, managers with a higher weighted average price on loans had generated better excess returns in the past except for March. By contrast, WAS showed a correlation of 0.01 with the excess return this month and bid depth showed a negative correlation of -0.02, both down from the high levels in March (Exhibit 3).

Exhibit 3: Correlation between loan attributes and 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.

Portfolio attributes differed slightly between managers with positive and negative excess returns.  For example, managers with a positive excess return in March on average had 41 points higher WARF than managers with a negative excess return, but the gap fell to 11 points in April (Exhibit 4).  It is worth noting that managers with positive excess return in April had lower weighted average Caa1 concentration.

Exhibit 4: Loan attributes difference between managers with positive excess return and negative excess return

Note: The numbers in loan attributes from managers with the negative excess return are subtracted from the numbers in loan attributes from managers with positive excess return.
Source: Intex, Markit, Amherst Pierpont Securities.

For the three months ending in April, Fortress, Ballyrock, Elmwood, and Oak Hill led all 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 April

 

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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