By the Numbers

CLO managers match the market after adjusting for risk

Caroline Chen | July 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. This material does not constitute research.

After adjusting for risk, the average CLO manager’s portfolio returns tracked by Amherst Pierpont were on par with the S&P/LSTA Total Return Index for the three months ending in June. This is the third time this year that managers’ performance matched or surpassed the index.

The 3-month trailing average of managers’ loan portfolio returns fell through June along with the broad market. After accounting for managers’ reporting dates, the S&P/LSTA Total Return Index posed a negative return of 164 bp for the three monthly reporting periods ending in June. 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 lost 168 bp and, in fact, lost exactly that amount, leaving the portfolio tied with the index after adjusting for risk.

Managers showed wide divergence in the amount of risk taken from a deal to deal and over time with their beta ranging from 0.86 to 1.28. Managers delivered excess return from 47 bp at the high end to -53 bp at the low end through June. Despite a very soft loan market in the second quarter, 41 out of the 78 managers delivered positive excess returns.

No excess returns in the second quarter

All 78 managers posted negative absolute total returns through June, ranging from -3.11% to -0.46%. The range is wider than the -2.26% to -0.13% seen in the last reporting period, reflecting the persistent weakness in the loan market. Overall, the -1.68% weighted average manager total return was on par with the return of the loan index in the second quarter after adjusting for an index beta of 1.02, resulting in no excess return.

If there is a silver lining to managers’ performance, it is the 41 managers, more than half of the 78 managers Amherst Pierpont tracked, that posted positive excess return in the second quarter. On a weighted average basis, the 41 managers delivered a solid 18 bp excess return over the index.

Exhibit 1. Active managers showed no excess return in the second quarter

Note: The data shows the average excess return relative to the S&P/LSTA Total Return Index for 78 managers with five or more active deals. The data cover performance for the three-monthly reporting periods ending on or before June 21, 2022.
Source: Intex, Markit, Amherst Pierpont Securities

The low beta managers lost the edge in performance

Both low beta and high beta managers’ excess return declined through June. But the high beta managers marginally outperformed the index by 1 bp while the low beta managers underperformed by 2 bp (Exhibit 2). Of the 41 managers who posted positive excess return over the index, 27 were from the high beta managers group.

Exhibit 2: Low beta managers led the performance decline in 2Q

Note: The data cover performance for the three-monthly reporting periods ending on or before June 21, 2022. High beta group includes 50 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 stayed weak

The correlation between loan attributes and managers’ excess return remained weak. It is hard to point out which loan attributes contributed to managers’ excess return for this period (Exhibit 3).

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 78 managers through June.
Source: Intex, Markit, Amherst Pierpont Securities.

AUM size impact is noisy, but a handful of small managers outperformed

Managers’ excess return performance often had wide dispersion and weak correlation with their AUM (Exhibit 4). However, a handful of small managers posted positive excess returns through June. The smallest 25% of CLO managers having an average of $3 billion AUM ended the second quarter with 8 bp excess return over the index. By contrast, the largest 25% of CLO managers with an average of $16.8 billion AUM delivered a negative 2 bp excess return in the same period.

Exhibit 4. Small managers outperformed large but with wide dispersion

Note: The data cover performance for the three-monthly reporting periods ending on or before June 21, 2022.
Source: Intex, Markit, Amherst Pierpont Securities.

Nine managers posted consistent, positive excess return in the first half of 2022

Nine managers outperformed the index in each of the first and second quarters of this year (Exhibit 5). But the list will be shortened to three if the reporting period included the last quarter of 2021, highlighting the challenge of delivering consistent performance.

Exhibit 5. Few managers showed consistent outperformance

Source: Amherst Pierpont Securities

For the three months ending in June, American Money, AXA, Ballyrock, Golub, and Elmwood 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 June

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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