By the Numbers
CLO managers pick up momentum through April
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.
After a streak of generally weak performance against the broad leveraged loan market, CLO managers through April generated the highest excess return of the past 12 reporting periods. Managers delivered solid returns in March and April to more than offset a weak performance in February. After adjusting for risk and reporting dates, managers concluded the most recent reporting period with a weighted average 16 bp of excess return. And although managers with lower risk loan portfolios continued to outperform managers running higher risk, even higher risk portfolios outperformed the loan index for the first time since July 2022.
Managers have topped the broad market since February
After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 2.35% for the three months ending in April. 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 2.40%, but managers instead posted a weighted average return of 2.56%, beating the index by 16 bp (Exhibit 1).
Exhibit 1: Managers delivered strong performances in recent reporting periods
Note: Each reporting period includes the most recent three months. For example, reporting period ending in April-23 includes the average manager performance in the past three months ending on or before Apr 20, 2023. The data shows the average excess return relative to the Morningstar/LSTA total return index for 86 managers with five or more active deals.
Source: INTEX, Markit, Santander US Capital Markets LLC.
Individual managers’ excess returns to the index ranged from a high of 116 bp to a low of -111 bp through April. Fifty-six out of the 86 managers outperformed, compared to 41 in the last reporting period.
High-beta managers outperformed but continued to trail their low-beta peers
The beta in the Santander US Capital Markets manager model, which measures the loan portfolio risk profile, ranged from a high risk of 1.20 to a low risk of 0.87. High-beta managers, those with a beta great than or equal to one, had lost to the index in eight out of the last 12 reporting periods but outperformed by a weighted average of 7 bp through April. Additionally, high-beta managers’ excess return performance improved by 10 bp from the last reporting period. Low-beta managers, those with a beta of less than 1, delivered a strong excess return of 34 bp through April (Exhibit 2). Low-beta managers led their peers in 10 out of the past 12 reporting periods.
Exhibit 2: Low beta managers maintained the lead
Note: Each reporting period includes the most recent three months. For example, reporting period ending in Apr-23 includes the average manager performance in the past three months ending on or before Apr 20, 2023. The high beta group includes 57 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.
A small group of 11 managers, mostly low-beta managers, outperformed the index consistently in at least four out of the past five quarters (Exhibit 3). All delivered solid 1-month excess return performance in April as well.
Exhibit 3: A short list of best performers
Source: INTEX, Markit, Santander US Capital Markets LLC
Managers’ performance dispersion rose again
The difference between the 75th and 25th percentiles of managers’ excess return fell for two consecutive periods but climbed to 53 bp in the April reporting period. The wide range of managers’ performance outcomes highlights that manager selection is an important factor in CLO investing.
Exhibit 4: Managers’ performance variability increased through April
Note: Each reporting period includes the most recent three months. For example, reporting period ending in Apr-23 includes the average manager performance in the past three months ending on or before Apr 20, 2023. The data shows the average excess return relative to the Morningstar/LSTA total return index for 86 managers with five or more active deals.
Source: INTEX, Markit, Bloomberg, Santander US Capital Markets LLC.
Loan attributes to performance remained weak
Loan attributes to managers’ excess return performance stayed weak (Exhibit 5). Nevertheless, loan prices remained the largest contributing factor to the performance.
Exhibit 5: Weak correlation to the performance through April
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 Apr 2023.
Source: INTEX, Markit, Santander US Capital Markets LLC.
For the three months ending in April, CBAM, Fortress, Generate Advisors, Napier Park and Oak Hills 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 April
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
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