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

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.

The Library

Search Articles