By the Numbers

CLO managers trail the loan market through July

Caroline Chen | August 11, 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’ loan portfolio performance continued to lag the broad market through July after adjusting for risk and reporting dates. Even managers with low-risk loan portfolios trailed the index after finishing ahead for most of the year, Low-risk portfolios still beat high-risk. Among the 10 best-performing managers, only three carried their positive momentum into July, while a few managers who are not on the best-performing list may worth highlighting for improved performance this year.

Managers’ performance lost to the index by 14 bp through July

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 3.37% for the three months ending in July. 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 3.44%, But managers instead posted an AUM-weighted return of 3.30%, lagging the index by 14 bp (Exhibit 1).

Exhibit 1: The loan portfolio performance of managers continues to deteriorate

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

Only 26 out of the 86 managers with five or more active deals outperformed. That compared to 35 in the June reporting period and 50 in May. Individual managers’ excess returns to the index through July ranged from a high of 54 bp to a low of -83 bp.

Low beta managers lost steam but maintained the lead

The manager beta in the Santander US Capital Markets manager model, which summarizes each manager’s loan portfolio risk, ranged from a high risk of 1.20 to a low risk of 0.87. High-beta managers, those with a beta greater than or equal to 1.0, underperformed the broad market in 10 out of the past 12 reporting periods. For the last three months through July, high-beta managers lagged the leveraged loan index by 19 bp on a weighted average basis. By contrast, risk-averse managers, those with a beta of less than 1.0 outperformed the market in 10 out of the past 12 periods (Exhibit 2). Despite a lackluster performance through July, the low-beta managers have led their high-beta peers by 15 bp.

Exhibit 2: Low beta managers outperformed 10 out of the last 12 periods

Note: Each reporting period includes the most recent three months. For example, reporting period ending in July-23 includes the average manager performance in the past three months ending on or before July 20, 2023. The high beta group includes 58 managers whose beta is over or equal to 1 with a median of 1.04. 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.

Managers’ overall weakening performance was also reflected in the 10 best-performing managers. Among the 10 managers who had consistently beaten the index in the past four quarters, only Generate Advisors, Ballyrock and Investcorp topped the index in July, with the remaining seven all having negative excess returns. It is worth highlighting three managers, King Street, Partners Group, and Canyon Capital that have shown an improving performance trend since October 2022 (Exhibit 3).

Exhibit 3: Managers in the Spotlight

Source: INTEX, Markit, Santander US Capital Markets LLC

Loan prices have been the major contributing factor to managers’ performance

Despite the general weak correlation between loan attributes and managers’ excess returns, loan prices have been the major contributing factor to portfolio excess return (Exhibit 4).

Exhibit 4: Loan attributes to managers’ excess returns have been weak

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 July 2023.
Source: INTEX, Markit, Santander US Capital Markets LLC.

The rankings

For the three months ending in July, Generate Advisors, King Street, AGL Credit, Anchorage, and Elmwood 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 5). A complete list of managers and their returns is here.

Exhibit 5: CLO manager performance for the three months ending July

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 6) and to data on more than 120 managers and more than 1,000 active deals is here.

Exhibit 6: 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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