By the Numbers

Managers top a weak loan market through May

| June 10, 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.

Excess return in the average CLO loan portfolio stayed positive for the three months ending in May. After adjusting for risk, the average manager tracked by Amherst Pierpont outperformed the S&P/LSTA Total Return Index by 3 bp. This is the second time this year that managers outperformed the index and the best performance since November 2021.

The 3-month trailing average of managers’ total returns all turned negative along with the broad market through May.  After accounting for managers’ reporting dates, the S&P/LSTA Total Return Index posted a negative return of 112 bp for the three monthly reporting periods ending in May. The average loan portfolio for managers with five or more actively tracked deals had a beta to the index of 1.02. With that beta, the average portfolio should have a negative return of 114 bp. Since the average portfolio instead lost 111 bp, it ended up with 3 bp of excess return.

The excess return posted by individual managers ranged from 56 bp at the high end to -43 bp at the low end, wider than the range from 30 bp to -61 bp in the prior reporting period. Of the 79 managers tracked, 42 or 53% posted positive excess return. Individual manager beta ranged from 1.28 at the high end to 0.85 at the low end, reflecting wide differences across managers in the amount of risk taken from a deal to deal and over time.

More than half managers maintained the positive momentum in the weak market

The leverage loan price dipped twice in the past three months.  The leveraged loan index total return finished at -1.12% for the three months ending in May after adjusting for the CLO deals reporting period.  All 79 managers posted negative returns during the period, ranging from -2.26% to -0.13%, but 42 managers delivered positive excess returns over the index.

Despite the wide dispersion in managers’ performance during the period, the overall 3-month trailing average performance improved by another 1 bp from the prior reporting period and stayed in positive territory (Exhibit 1).

Exhibit 1. CLO managers beat the index during the leveraged loan price rout

Note: The data shows the average excess return relative to the S&P/LSTA Total Return Index for 79 managers with five or more active deals. The data cover performance for the three-monthly reporting periods ending on or before May 20, 2022.
Source: Intex, Markit, Amherst Pierpont Securities

The low beta managers led by a moderate margin

The low beta managers have consistently outperformed their high beta counterparts this year, but the difference has narrowed lately.  Most of the difference came from high beta managers. The average excess return of the high beta managers improved for the 3-month period ending in May (Exhibit 2).

Exhibit 2: Both low and high beta managers outperformed index this period

Note: The data cover performance for the three-monthly reporting periods ending on or before May 20, 2022.  High beta group includes 51 managers whose beta over 1 with a median of 1.05.  Low beta group includes 28 managers whose beta no more than 1 with a median of 0.98.
Source: Intex, Markit, Amherst Pierpont Securities.

The linkage of loan attributes to excess return was weak

The correlation between loan attributes and managers’ excess return was weak. It is hard to pinpoint which loan attributes contributed to managers’ excess return for this period (Exhibit 3).  Bid depth showed a negative 0.34 correlation, suggesting illiquid assets may perform relatively well during market volatility.

Exhibit 3. Loan attributes to performance were muted

Note: Data shows correlation of each measure, calculated across each manager’s outstanding deals, with excess return or alpha as measured for 79 managers through May.
Source: Intex, Markit, Amherst Pierpont Securities.

Noisy impact of size

Of the 79 managers tracked during the period, the managers’ median CLO assets under management was $6 billion, ranging from $0.8 billion at the low end to $26 billion at the high end. This counts just outstanding CLOs, not other leveraged loan investments a manager might have. The largest 25% of CLO managers with an average of $16.7 billion AUM delivered a weighted average of 3 bp excess return for the period.  By contrast, the smallest 25% of CLO managers with an average of $2.9 billion AUM delivered 7 bp excess return in the same period (Exhibit 4).  The relationship is noisy, however, and not statistically significant.

Exhibit 4. Smaller outperformed larger managers but with wide dispersion

Note: The data cover performance for the three-monthly reporting periods ending on or before May 20, 2022.
Source: Intex, Markit, Amherst Pierpont Securities.

Seven managers delivered consistent, positive excess return

Seven managers outperformed the index in each of the independent 3-month reporting periods covering the past nine months, five with beta below 1.0 and two with beta above 1.0 (Exhibit 5).  It is worth noting that all seven managers have current CLO AUM larger than the $6 billion median of the 79 managers tracked.

Exhibit 5. Managers outperformed are mostly low beta managers

For the three months ending in May, Jefferies, Fortress, Golub, ZAIS, and Generate Advisors led all managers with the highest excess return.  A list of all managers and their level of excess return is below (Exhibit 6).  A complete list of managers and their returns is here.

Exhibit 6.: CLO manager performance for the three months ending May

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

Exhibit 7: 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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