By the Numbers

A rocky start to the year for CLO managers

| February 10, 2023

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.

CLO managers through January turned in one of the weakest performances against the broad leveraged loan market of the last two years. After adjusting for risk, reporting dates and AUM, managers over the three months ending in January trailed the market by 18 bp. Managers who positioned loan portfolios conservatively came close to matching the return of the Morningstar/LSTA loan index while managers who took a riskier approach continued to underperform. Manager performance dispersion also stayed high, and some low-beta managers lagged the index in January after outperforming in 2022.

CLO managers’ performance once again trailed the index

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 2.86% for the January reporting period.  The average loan portfolio for managers with five or more actively tracked deals had a beta to the index of 1.03.  With that beta, the average loan portfolio should have returned 2.93%, but managers only posted a return weighted by AUM of 2.75%, trailing the index by 18 bp.  This underperformance marks the worst of the past 24 reporting periods (Exhibit 1).

Exhibit 1: Managers lagged the index in most reporting periods

Note:  Each reporting period includes the most recent three months.  For example, reporting period ending in Jan-23 includes the average manager performance in the past three months ending on or before January 20, 2023.   The data shows the average excess return relative to the Morningstar/LSTA total return index for 87 managers with five or more active deals.
Source: INTEX, Markit, Santander US Capital Markets LLC.

For the January reporting period, individual managers’ excess returns to the index ranged from a high of 64 bp to a low of -180 bp. Twenty-eight out of 87 managers tracked outperformed, and most of the outperformers positioned their loan portfolios conservatively, as measured by portfolio beta.

Greater performance variability, fewer winners

In recent reporting periods, CLO managers’ performance has become more dispersed. The difference between the 75th and 25th percentiles of managers’ excess return, for example, was 17 bp in the reporting period ending in January 2022 but increased to 57 bp in the most recent period (Exhibit 2).

Exhibit 2: Rising variability in managers’ excess returns

Note:  Each reporting period includes the most recent three months.  For example, reporting period ending in Jan-23 includes the average manager performance in the past three months ending on or before January 20, 2023. The data shows the average excess return relative to the Morningstar/LSTA total return index for 87 managers with five or more active deals.
Source: INTEX, Markit, Bloomberg, Santander US Capital Markets LLC.

Six managers outperformed the index in each of the four quarters of 2022. However, after incorporating January’s 1-month results, the list shrank to three, highlighting a bumpy start for most managers in 2023 (Exhibit 3).

Exhibit 3: A short list of consistent outperformers

Source: INTEX, Markit, Santander US Capital Markets LLC

High beta managers’ underperformance deepened

Managers’ loan portfolio risk profile, measured by the beta in the Santander manager model, ranged from a high risk of 1.21 to a low risk of 0.89. Risk-averse managers, those with a beta less than 1, outperformed the index on a weighted average basis in five consecutive reporting periods but barely kept up with the index in the reporting period ending in January. On the other hand, losses to the index deepened for managers with a beta greater than or equal to 1. With a weighted average of 28 bp loss to the index, those high beta managers had the worst performance in the last 12 reporting periods (Exhibit 4).

Exhibit 4: All are under pressure to perform

Note:  Each reporting period includes the most recent three months.  For example, reporting period ending in Jan-23 includes the average manager performance in the past three months ending on or before January 20, 2023.   The high beta group include 59 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, Santander US Capital Markets LLC.

Loan prices and liquidity were contributing factors to the excess return

In past two reporting periods, loan prices and liquidity have exhibited a relatively strong correlation with managers’ excess returns (Exhibit 5). Risk averse manager with lower credit risk loans and more liquid portfolios may benefit from recent leveraged loan price rally more than their peers.

Exhibit 5: Price and liquidity have shown more correlation to performance

Note:  Data shows the correlation of each measure, calculated across each managers’ outstanding deals, with excess return or alpha as measured for 87 managers through January 2023.
Source: INTEX, Markit, Santander US Capital Markets LLC.

For the three months ending in January, Pinebridge, Elmwood, Blackrock, Goldentree and AIG 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 return is here.

Exhibit 6: CLO manager performance for the three months ending January

Note: Performance for managers with five or more deals issued since January 1, 2011, and tracked by SanCap. 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 SanCap’s latest CLO manager bubble chart (Exhibit 7) and to data on more than 120 managers and more than 1,000 active deals is here.

Exhibit 7: SanCap CLO manager bubble chart

Note: The size of each bubble reflects manager long-term beta.
Source: Intex, Markit, Santander US Capital Markets LLC

Caroline Chen
caroline.chen@santander.us
1 (646) 776-7809

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