By the Numbers

CLO managers finish the summer trailing the market

| September 9, 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.

Nearly half of CLO managers’ loan portfolios beat the Morningstar/LSTA Total Return Index from June through August, but a handful of managers struggled to keep up with the market.  After adjusting for risk, the average manager performance trailed the index by 1bp for the three months ending in August.

The Morningstar/LSTA Total Return Index posted a negative return of 0.48% for the three monthly reporting periods ending in August, after accounting for managers’ reporting dates.   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 0.49%, but instead, managers lost 0.50% leaving the portfolio behind the index by 1 bp after adjusting for risk.

The excess return posted by individual managers ranged from 76 bp at the high end to -85 bp at the low end.   Of the 82 managers tracked, 39 or 48% posted positive excess returns.  Low beta managers had a strong performance in the summer with a weighted average of 5 bp excess return to the index from June through August.

Managers’ performance improved and finished the summer just behind the index

After beating the index in the spring, managers’ loan portfolio returns have lost to the index since May. The summer race was particularly tight.  The loan market witnessed a large price swing from $91.75 at the beginning of July to $94.5 at the end of August.  The managers’ weighted average total returns also improved from -5.29% for the three months through July to -0.50% for the three monthly reporting periods ending in August.  But on an average excess return basis, managers had a 1 bp loss to the market through August (Exhibit 1).

Exhibit 1. Managers’ average excess returns had a small loss through August

Note: The data shows the average excess return relative to the Morningstar/LSTA Total Return Index for 82 managers with five or more active deals. The data cover performance for the three-monthly reporting periods ending on or before August 22, 2022.
Source: Intex, Markit, Amherst Pierpont Securities

Low beta managers played a big comeback

Individual manager beta ranged from 1.23 at the high end to 0.89 at the low end, reflecting the wide difference in the amount of risk managers took.  Low beta managers, those who had a beta less than 1, lost to the market by 16 bp from May to July but outperformed the market by 5 bp for the three monthly reporting periods ending in August (Exhibit 2).   By contrast, managers who had a beta greater than or equal to 1 underperformed the market by 5 bp.  Low beta managers outperformed their high beta peers four out of the past six reporting periods.

Exhibit 2: Low beta managers’ performance shined through August

Note: The data cover performance for the three-monthly reporting periods ending on or before August 22, 2022.  The high beta group includes 52 managers whose beta is over 1 with a median of 1.05.  The low beta group includes 30 managers whose beta is no more than 1 with a median of 0.98.
Source: Intex, Markit, Amherst Pierpont Securities.

Higher prices and more liquid loans may help to add returns

The correlation between loan attributes and managers’ excess return has stayed weak.  But loan price showed a correlation of 0.61 with managers’ excess returns through August, stronger than the correlation with loan risk factors, spread, and diversity score.  In addition, the correlation between bid depth and excess returns turned positive, implying loans with better liquidity may help in managers’ performance during the period.

Exhibit 3. Loan price and bid depth had stronger correlation with excess returns

Note: Data shows the correlation of each measure, calculated across each manager’s outstanding deals, with excess return or alpha as measured for 82 managers through August.
Source: Intex, Markit, Amherst Pierpont Securities.

Consistency matters

There are nine managers who delivered positive excess returns in the first two quarters of this year, but the list is shortened to four if includes the managers’ performance from June to August (Exhibit 4).  Except for CSAM, the remaining three managers are all low beta managers.  It is worth noting that the median information ratio of CLO deals Amherst Pierpont tracked has stayed at 0.06, implying most managers have some consistency in levels of excess return and beta over the long run.

Exhibit 4. Four managers delivered positive excess returns in the quarterly reporting period and the latest reporting period

For the three months ending in August, CVC Credit Partners, AIG, Blackrock, Oaktree, and Ballyrock led all managers with the highest excess return.  A list of all managers and their level of excess return is below (Exhibit 5).  A complete list of managers and their returns is here.

Exhibit 5. CLO manager performance for the three months ending August

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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