By the Numbers

CLO managers’ losing streak continues

Caroline Chen | March 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. This material does not constitute research.

CLO managers have continued along a bumpy road. After trailing the performance of the Morningstar/LSTA leveraged loan index since July, the February reporting period was no exception. The average CLO loan portfolio after adjusting for risk and reporting dates turned in the weakest performance in at least two years, trailing the index by 20 bp. Managers who positioned loan portfolios relatively conservatively did better than average but also trailed the index after a long stretch of outperformance.

CLO managers’ 20 basis point loss to the index was the highest in two years

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 4.63% for the three months ending in February. 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 4.73%, but the average portfolio only posted a return of 4.53%, trailing the index by 20 bp. Managers have underperformed the index since July 2022, with the most recent loss marking the worst since at least March 2021 (Exhibit 1).

Exhibit 1: The performance of managers has been on a long losing streak

Note: Each reporting period includes the most recent three months. For example, reporting period ending in Feb-23 includes the average manager performance in the past three months ending on or before February 21, 2023. The data shows the average excess return relative to the Morningstar/LSTA total return index for 85 managers with five or more active deals.
Source: INTEX, Markit, Santander US Capital Markets LLC.

Individual managers’ excess returns for the three months ending in February ranged from a high of 39 bp to a low of -134 bp. Twenty-two of the 85 managers tracked outperformed the index. Of the outperformers, 12 were low beta managers who have conservatively positioned their loan portfolios.

Low beta managers began to fall behind the index

Manager beta, which measures portfolio risk across all active deals on a manager platform, ranged through February from a high of 1.21 to a low of 0.89. Low-risk managers, those with a beta of less than 1.0, had outperformed the index on a weighted average basis since August but lost to the index in February by 11 bp. On the other hand, the loss to the index narrowed slightly for managers with a beta greater than or equal to 1.0. With a weighted average loss to the index of 24 bp, high beta managers improved by 4 bp from the last reporting period (Exhibit 2).

Exhibit 2: Low beta managers had a lackluster performance in February

Note: Each reporting period includes the most recent three months. For example, reporting period ending in Feb-23 includes the average manager performance in the past three months ending on or before February 21, 2023. 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 29 managers whose beta is no more than 1 with a median of 0.98.
Source: INTEX, Markit, Santander US Capital Markets LLC.

Performance dispersion has narrowed

The difference between the 75th and 25th percentiles of managers’ excess return fell to 43 bp in the February reporting period, down from a recent high of 57 bp (Exhibit 3).

Exhibit 3: Performance variability reduced through February

Managers across the board have struggled to outperform the index, including those who had consistently outperformed the index last year. After incorporating January and February results, even a few of the best-performing managers of last year reported a loss to the index (Exhibit 4).

Exhibit 4: Some best performing managers trailed the index in February

Source: INTEX, Markit, Santander US Capital Markets LLC

Loan prices and liquidity remain contributing factors to the excess return

Loan prices and liquidity continued to show a relatively strong correlation with managers’ excess returns in the February reporting period (Exhibit 5). Low beta managers with more liquid portfolios and lower credit risk loans may benefit from the recent loan price rally.

Exhibit 5: Price and bid depth have shown stronger correlation to performance

Note: Data shows the correlation of each measure, calculated across each manager’s outstanding deals, with excess return or alpha as measured for 85 managers through February 2023.
Source: INTEX, Markit, Santander US Capital Markets LLC.

For the three months ending in February, CBAM, Blackrock, Elmwood, Ballyrock, and Ares led all managers with the highest excess return. A list of managers with five or more active deals and their excess returns is below (Exhibit 6). A complete list of managers and their returns is here.

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

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 Morningstar/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 attributes to beta and actual performance is attributed to manager alpha.
Source: INTEX, Markit, Santander US Capital Markets LLC

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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