By the Numbers

Manager returns lag the market through July

Caroline Chen | August 5, 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, returns in the average CLO manager’s loan portfolio tracked by Amherst Pierpont lost to the S&P/LSTA Total Return Index by 2 bp for the three months ending in July. Despite a modest loan price rebound in July, the returns in the average portfolio finished negative along with the broad market.

After accounting for managers’ reporting dates, the S&P/LSTA Total Return Index posted a negative return of 5.15% for the three monthly reporting periods ending in July. The average loan portfolio for managers with five or more actively tracked deals had a beta to the index slightly above 1.02. With that beta, the average portfolio should have lost 5.27%, but instead, managers lost 5.29% leaving the portfolio behind the index by 2 bp.

Managers showed wide divergence in the amount of risk taken from deal to deal and over time with their beta ranging from 0.86 to 1.26. Managers delivered excess return from 166 bp at the high end to -83 bp at the low end, a 249 bp gap through July. By contrast, the gap between the top and bottom managers was 100 bp in the second quarter.

Managers’ performance softened, but half delivered positive excess returns

Managers’ absolute total returns weakened across the board through July. Their negative total returns ranged from -6.04% to -4.07%, well below the range between -3.11% and -0.46% seen through June.

Despite negative absolute returns, half of the managers were able to deliver positive excess returns after adjusting for portfolio beta and reporting dates. On a weighted average basis, forty managers delivered a solid 38 bp excess return over the index. The remaining forty managers whose performance fell behind the loan index posted a weighted average of negative 30 bp excess return.

Exhibit 1. Managers’ average excess returns flipped to negative through July

Note: The data shows the average excess return relative to the S&P/LSTA Total Return Index for 80 managers with five or more active deals. The data cover performance for the three-monthly reporting periods ending on or before July 20, 2022.
Source: Intex, Markit, Amherst Pierpont Securities

More low beta managers posted lackluster performance

Low beta managers underperformed their high beta peers by 3 bp through June, but the difference increased to 21 bp for the three monthly reporting periods ending in July. A larger share of low beta managers’ performance was in the red through July. Out of 27 low beta managers, eighteen posted negative excess returns. By contrast, fourteen out of 28 low beta managers had negative excess returns in the prior reporting period. The weighted average excess return of the high beta managers has stayed in positive territory in the past three reporting periods (Exhibit 2).

Exhibit 2: Low beta managers led the performance decline through July

Note: The data cover performance for the three-monthly reporting periods ending on or before July 20, 2022. High beta group includes 53 managers whose beta over 1 with a median of 1.05. Low beta group includes 27 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. Both weighted average portfolio loan prices and bid depth have shown an increasingly negative correlation with the excess return performance (Exhibit 3). The loan market volatility during the period may contribute to the relatively good performance of illiquid assets.

Exhibit 3. Loan attributes to performance remain muted

Note: Data shows the correlation of each measure, calculated across each manager’s outstanding deals, with excess return or alpha as measured for 80 managers through July.
Source: Intex, Markit, Amherst Pierpont Securities.

Small managers led the performance, but the size impact remains noisy

The smallest 25% group includes 20 managers with an average of $3 billion CLO AUM. Eleven of them delivered positive excess returns through July. The weighted average excess return of the smallest 25% managers was 4 bp over the loan index.

The largest 25% group also includes 20 managers. By contrast, only seven in that group delivered positive excess returns during the same period. The weighted average excess return of the largest 25% managers was a negative 7 bp with an average CLO AUM of $16.8 billion. Overall, the managers’ AUM size impact remains weak (Exhibit 4).

Exhibit 4. Managers’ performance continues to show wide dispersion

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

It is all about consistency

Nine managers outperformed the index in each of the first and second quarters of this year, and they carried their positive performance momentum through July (Exhibit 5). Managers’ performance dispersion is also palpable in this small set of managers with the lowest excess return at 8 bp and the highest at 166 bp.

Exhibit 5. The nine managers maintained their positive performance through July

For the three months ending in July, ZAIS, Jefferies Finance, Marathon Asset Management, Golub Capital, and Nassau Credit 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 July

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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