By the Numbers
A review of CLO managers in 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.
CLO managers who positioned portfolios conservatively outperformed the broad leveraged loan market through most of last year while managers that took a riskier profile broadly underperformed. And December was no exception. Conservative or low beta managers posted an average of 13 bp of excess return over the Morningstar LSTA US Leveraged Loan Index in December while high beta managers underperformed the index by an average of 20 bp. The average manager underperformed last month.
The average performance of CLO managers was lackluster through 2022
The leveraged loan index posted a return of 0.50% for the reporting period ending in December, 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 posted a gain of 0.52%, but instead, managers on a weighted average basis delivered a gain of 0.43%, leaving the portfolio behind the index by 9 bp after adjusting for risk (Exhibit 1).
Exhibit 1. Managers’ average portfolio performance lost to the index in six consecutive periods
Note: Each reporting period includes the most recent three months. For example, reporting period ending in Dec-22 includes the average manager performance in the past three months ending on or before December 20, 2022. The data shows the average excess return relative to the Morningstar/LSTA Total Return Index for 84 managers with five or more active deals.
Source: Intex, Markit, Amherst Pierpont Securities
The excess return posted by individual managers ranged from 67 bp at the high end to -124 bp at the low end for the December reporting period.
Based on average excess returns, managers’ loan portfolio performance trailed the broad market in nine out of 12 reporting periods last year, after adjusting for CLO reporting dates (Exhibit 1). The average 9 bp loss to index in the most recent reporting period was the highest of the year.
A trend of increasing performance variability
Managers’ excess returns have shown greater dispersion lately. For example, the difference between the 75th percentile and the 25th percentile of excess return averaged 23 bp in the first six reporting periods of 2022 but more than doubled to 49 bp in the last six reporting periods (Exhibit 2).
Exhibit 2. Managers’ excess returns have shown a trend of rising variability
Note: Each reporting period includes the most recent three months. For example, reporting period ending in Dec-22 includes the average manager performance in the past three months ending on or before December 20, 2022.
Source: Intex, Markit, Amherst Pierpont Securities.
Managers’ risk positionings set their performance apart
Managers’ risk positioning may be an explanation for the increasing level of performance dispersion. Managers’ risk positioning, measured by the beta in the APS manager model, ranged from 1.22 at the high end to 0.88 at the low end. The group of risk-averse managers, those having a beta lower than 1, posted a gain to the index in nine of 12 reporting periods last year (Exhibit 3). High beta managers, those having a beta greater than or equal to 1, only posted a gain to the index in three out of the same 12 reporting periods. In general, low beta managers led their high beta peers in 10 reporting periods.
The performance difference between low-beta and high-beta managers has also grown larger. Weighted by managers’ CLO AUM, the excess returns of the low beta managers led their high beta peers by more than 30 bp in the last four reporting periods in 2022. By contrast, the gap was only 8 bp at the beginning of the year.
Exhibit 3. Low beta managers were better performed in most of the periods
Note: Each reporting period includes the most recent three months. For example, reporting period ending in Dec-22 includes the average manager performance in the past three months ending on or before December 20, 2022. The high beta group includes 56 managers whose beta is over or equal to 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.
Loan prices were the largest contributing factor to the excess returns
Loan prices had shown a relatively strong correlation with managers’ excess returns in most reporting periods of 2022 (Exhibit 4). Higher loan prices typically signal lower credit risk, and low beta managers generally have higher loan prices in their CLO loan portfolios.
Exhibit 4. Loan prices remain 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 84 managers through December.
Source: Intex, Markit, Amherst Pierpont Securities.
A few winners in a bear market
The median information ratio of CLO deals tracked by the APS manager model implies most managers have some consistency in long-run performance, but only six out of 84 active managers APS tracked delivered positive excess returns in every quarter of 2022. Except for CSAM, all remaining managers are low beta managers (Exhibit 5).
Exhibit 5. Six managers’ loan portfolios outperformed the index every quarter
Source: Intex, Markit, Amherst Pierpont Securities
For the three months ending in December, Elmwood, AIG, CVC Credit Partners, and PineBridge 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 November
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
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