By the Numbers

Low beta managers win again through October

| November 4, 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 manager’s loan portfolio performance trailed the broad leveraged loan market again through October. But managers of portfolios with a a low beta to the broad market again rose above the crowd and delivered positive excess returns, adding to generally positive excess returns since June. These risk-averse managers now lead their risk-taking peers by the widest margin of the year.

The average manager trails the market

The Morningstar/LSTA Total Return Index posted a positive return of 1.46% for the three months ending in October, 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, meaning a 1% move in the index should produce an average 1.02% return.  With that beta, the average portfolio should have delivered a total return of 1.49%. But instead, managers on a weighted average basis posted a return of 1.44%, leaving the portfolio behind the index by 5 bp after adjusting for risk.

The excess return posted by individual managers ranged from 76 bp at the high end to -111 bp at the low end. Of the 83 managers tracked, 39 or 47% outperformed the index through October and most of them were low beta managers. On a weighted average basis, 28 low beta managers delivered a 21 bp excess return to the index through October, the highest year-to-date.

Managers’ performance trailed the index in eight out of twelve reporting periods

On an average excess return basis, managers’ loan portfolio performance trailed the broad market in eight out of 12 three-month reporting periods, after adjusting for CLO reporting dates and loan portfolio risks (Exhibit 1).  Additionally, managers’ weighted average total return was 144 bp for the three months ending in October, 14 bp lower than the weighted average total return in the third quarter.

Exhibit 1. Managers have struggled to keep up with the broad market

Note: The data shows the average excess return relative to the Morningstar/LSTA Total Return Index for 83 managers with five or more active deals. The data cover performance for the three-monthly reporting periods ending on or before October 20, 2022.
Source: Intex, Markit, Amherst Pierpont Securities

Risk matters, not the size

Managers’ beta, reflecting the amount of risk managers took in their CLO loan portfolio, ranged from 1.22 at the high end to 0.88 at the low end.  Weighted by managers’ CLO AUM, 28 low beta managers, those having a beta less than 1, outperformed the market by 21 bp through October (Exhibit 2).   Year-to-date, the group of risk-averse managers has delivered positive excess returns in seven out of the 10 three-month reporting periods.  By contrast, high beta managers, those having a beta greater than or equal to 1, had positive excess returns in only three out of the past ten reporting periods.   Moreover, low-beta managers have led their high-beta peers in most reporting periods year-to-date.  For the three months through October, the 40 bp lead was the highest in a year.

Exhibit 2. Low beta managers were better performed in most of the periods

Note: The data cover performance for the three-monthly reporting periods ending on or before October 20, 2022.  The high beta group includes 55 managers whose beta is over 1 with a median of 1.05.  The low beta group includes 28 managers whose beta is no more than 1 with a median of 0.98.
Source: Intex, Markit, Amherst Pierpont Securities.

Compared to loan portfolio risk, managers’ CLO AUM size is a less relevant factor in their performance.  CLO AUM size generally has a noisy relationship with managers’ performance.  Managers who took less risk than the broad loan market may outperform regardless of their small CLO AUM size (Exhibit 3).

Exhibit 3. CLO AUM size is less impactful to managers’ performance

Note: The data shows the average excess return relative to the Morningstar/LSTA Total Return Index for 83 managers with five or more active deals. The data cover performance for the three-monthly reporting periods ending on or before October 20, 2022.
Source: Intex, Markit, Amherst Pierpont Securities

Loan prices continue to contribute to the managers’ positive excess return

Loan prices also have shown a strong positive relationship with managers’ excess returns since June (Exhibit 4).  Higher loan prices typically signal lower credit risk, and low beta managers generally have higher loan prices in their CLO loan portfolios.  The remaining loan attributes all had a weak correlation with managers’ performance.

Exhibit 4. Loan prices are the most correlated to managers’ excess return

Note: Data shows the correlation of each measure, calculated across each manager’s outstanding deals, with excess return or alpha as measured for 83 managers through September.
Source: Intex, Markit, Amherst Pierpont Securities.

The list of consistent outperformers this year is short

The median information ratio of CLO deals tracked by Amherst Pierpont implies most managers have some consistency in long-run performance, but a few CLO managers delivered positive excess returns in each of the past three quarters as well as October.  Except for CSAM, all managers are low beta managers (Exhibit 5).

Exhibit 5. Most managers who outperformed consistently have low beta

Source: Intex, Markit, Amherst Pierpont Securities

For the three months ending in September, Elmwood, AIG, Sixth Street, Ballyrock, and Allstate 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 October

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 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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