By the Numbers

Managers top the index through May as low beta leads

Caroline Chen | June 9, 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.

The average CLO manager, after adjusting for risk and reporting dates, delivered a return 13 bp better than the broad leveraged loan index for the three months ending in May. Managers with lower-risk loan portfolios continued to deliver more excess return than peers, with a handful delivering consistently better performance since the beginning of 2022. The consistent performance points to low beta managers with wide debt, all else equal, as better relative value.

Managers have improved performance since February

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 0.84% for the three months ending in May. 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 0.85%, but managers instead posted a return of 0.98% on a weighted average basis, beating the index by 13 bp (Exhibit 1).

Exhibit 1: Managers delivered strong performance in recent reporting periods

Note: Each reporting period includes the most recent three months. For example, reporting period ending in May-23 includes the average manager performance in the past three months ending on or before May 22, 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 through May ranged from a high of 110 bp to a low of -62 bp. Fifty out of the 86 managers outperformed, compared to 56 in the last reporting period.

Managers outperformed, but low-beta managers continue to win the race

The beta in the Santander US Capital Markets manager model, which measures the loan portfolio risk profile, ranged from a high of 1.20 to a low of 0.87. High-beta managers, those with a beta great than or equal to 1.0, topped the broad market recently after a streak of generally weak performance. For the last three months through May, high-beta managers generated a modest, weighted average of 6 bp excess return. Risk-averse managers, those with a beta of less than 1.0, on the other hand, delivered a strong excess return of 29 bp in the period (Exhibit 2). Low-beta managers continue to outperform, leading their peers in 10 out of the past 12 reporting periods.

Exhibit 2: Low beta managers have outperformed

Note: Each reporting period includes the most recent three months. For example, reporting period ending in May-23 includes the average manager performance in the past three months ending on or before May 22, 2023. The high beta group includes 58 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.

A small group of 11 managers, mostly low-beta managers, outperformed the index consistently in at least four out of the past five quarters. All delivered solid 1-month excess return performance in April, but only five maintained the positive momentum in May (Exhibit 3).

Exhibit 3: A short list of best performers had mixed performance results in May

Source: INTEX, Markit, Santander US Capital Markets LLC

Managers’ excess returns have increasingly correlated with WARF and WAS

The correlation between loan attributes and managers’ excess returns have generally stayed weak and statistically insignificant, but WARF and WAS have recently exhibited a rising correlation to managers’ performance (Exhibit 4). By contrast, performance contributed by loan prices has weakened. In addition, less liquid loans may have contributed more to managers’ returns recently than liquid loans.

Exhibit 4: A rising correlation of WARF and WAS to managers’ performance

Note: Data shows the correlation of each measure, calculated across each manager’s outstanding deals, with excess return or alpha as measured for 86 managers through May 2023.
Source: INTEX, Markit, Santander US Capital Markets LLC.

Managers who have positioned their loan portfolios with relatively higher WARF and WAS or less liquid loans often take more risk than the index. This observed trend may explain the improved performance of high-beta managers in the last two reporting periods.

The rankings

For the three months ending in May, Fortress, Golub, Generate Advisors, CBAM,and ICG Debt Advisors 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 5: CLO manager performance for the three months ending May

Note: Performance for managers with five or more deals issued since January 1, 2011, and tracked by Santander US Capital Markets. 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 Santander US Capital Markets’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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