The Long and Short

Managers recover lost ground through March

Caroline Chen | April 14, 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’ excess return bounced back into positive territory in March after falling behind the Morningstar/LSTA leveraged loan index for eight consecutive reporting periods. Managers generated a solid 1-month performance in March and concluded the quarter, after adjusting for risk and reporting dates, with a modest 2 bp of weighted average excess return. Managers who positioned loan portfolios more conservatively than the index led the pack. Additionally, managers’ performance dispersion has continued to fall.

Managers outperformed the broad market by a narrow margin

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 3.67% for the three months ending in March. The average loan portfolio for managers with five or more actively tracked deals had a beta to the index of 1.02. With that beta, the average loan portfolio should have returned 3.75%, but managers instead posted a weighted average return of 3.77%, beating the index by 2 bp (Exhibit 1).

Exhibit 1: Managers top the loan market through March

Note: Each reporting period includes the most recent three months. For example, reporting period ending in March-23 includes the average manager performance in the past three months ending on or before Mar 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.

Individual managers’ excess return in the first quarter ranged from a high of 98 bp to a low of -93 bp. Forty-one out of the 87 managers tracked outperformed, with 18 of the 41 being low beta managers who have conservatively positioned their loan portfolios.

Low beta managers stay in the lea, including a few of the best performers

The beta in the Santander manager model, which measures loan portfolio risk, ranged from a high risk of 1.20 to a low risk of 0.88 for managers. Compared to the performance in the past two reporting periods, all managers’ performance improved through March. Risk-averse managers, those with a beta of less than 1, had outperformed the index in March by a weighted average 10 bp (Exhibit 2). Managers with a beta greater than or equal to one, on the other hand, saw their loss to the index narrow. High beta managers improved by 21 bp over the previous reporting period, with a weighted average loss of 3 bp to the index.

Exhibit 2: Low beta managers outperformed while high beta managers trailed

Note: Each reporting period includes the most recent three months. For example, reporting period ending in Mar-23 includes the average manager performance in the past three months ending on or before Mar 20, 2023. The high beta group includes 60 managers whose beta is over or equal to 1 with a median of 1.04. The low beta group includes 27 managers whose beta is no more than 1 with a median of 0.98.
Source: INTEX, Markit, Santander US Capital Markets LLC.

Four managers consistently outperformed the index in 2022 as well as the first quarter of this year. Except for CSAM, the remaining three are all low beta managers. Additional seven managers delivered positive excess returns in four out of the past five quarters, and again, all are low beta managers except for Investcorp (Exhibit 3).

Exhibit 3: A short list of best performers

Source: INTEX, Markit, Santander US Capital Markets LLC

Performance dispersion has continued to decline

The difference between the 75^th and 25^th percentiles of managers’ excess return narrowed to 33 bp in the March reporting period, a level last seen in the second quarter of 2022.

Exhibit 4: Managers’ performance variability retreated from a recent high

Note: Each reporting period includes the most recent three months. For example, reporting period ending in Mar-23 includes the average manager performance in the past three months ending on or before Mar 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.

Performance had weak correlations to loan attributes through March

Loan prices and liquidity showed a relatively strong correlation with managers’ excess returns in the past two reporting periods, but their correlation to the excess returns weakened through March (Exhibit 5). Nevertheless, loan prices remained the largest contributing factor to the performance.

Exhibit 5: Weak correlation to the performance through March

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

For the three months ending in February, CBAM, Elmwood, Pacific Life, Oakhill, and Fortress 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 March

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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