By the Numbers

Risk-averse managers prevailed amid the loan price rally

| September 15, 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.

Despite rising loan prices, CLO managers’ performance after adjusting for risk and reporting dates lagged the broad market through August.  However, managers with low-risk loan portfolios topped the market and continue to outperform their rivals with high-risk portfolios.  The majority of the 10 best-performing managers have low-risk loan portfolios and most have extended their strong performance momentum into August.

Manager performance trailed the index by 10 bp through August

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 3.85% for the August reporting period. 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 3.92%, but managers instead posted a return weighted by AUM across managers of 3.82%, trailing the index by 10 bp (Exhibit 1).

Exhibit 1: The loan portfolio performance of managers stayed negative

Note:
1) Each reporting period includes the most recent three months.  For example, reporting period ending in Aug-23 includes the average manager performance in the past three months ending on or before Aug 21, 2023.   2) The August reporting period data shows the average excess return relative to the Morningstar/LSTA total return index for 84 managers with five or more active deals.  3) Deals managed by CBAM, Marble Point, and Alcentra were reported under Carlyle, Investcorp, and Benefit Street, respectively in the latest reporting period.
Source: INTEX, Markit, Santander US Capital Markets LLC.

Thirty of the 84 managers delivered excess returns through August compared to 26 in the July reporting period and 35 in June. Individual managers’ excess returns to the index ranged from a high of 56 bp to a low of -72 bp.

Low beta managers recovered after a weak showing through July

The beta in the Santander US Capital Markets manager framework, which measures the loan portfolio risk profile, ranged from a high risk of 1.20 to a low risk of 0.87 for managers. High-beta managers, those with a beta greater than or equal to one, underperformed the broad market in 10 out of the past 12 reporting periods.  For the last three months through August, high-beta managers lagged the leveraged loan index by an AUM-weighted 16 bp.  By contrast, risk-averse managers bounced back from last period’s lackluster performance and outperformed the market by 1 bp.

Exhibit 2: Low beta managers outperformed 9 out of the last 12 periods

Note:  Each reporting period includes the most recent three months.  For example, reporting period ending in Aug-23 includes the average manager performance in the past three months ending on or before Aug 21, 2023.   The high beta group includes 54 managers whose beta is over or equal to 1 with a median of 1.05. The low beta group includes 30 managers whose beta is no more than 1 with a median of 0.98.
Source: INTEX, Markit, Santander US Capital Markets LLC.

The performance advantage of low beta managers also shows up on the list of the 10 best-performing managers. The majority of the 10 managers who had consistently beaten the index in the past four quarters are low-beta managers, and most have continued their strong performance into August.  King Street, Partners Group, and Canyon Capital have shown an improving performance trend since October 2022 and outperformed through August as well (Exhibit 3).

Exhibit 3: Managers in the Spotlight

Note: Investcorp performance in August included deals managed by Marble Point.
Source: INTEX, Markit, Santander US Capital Markets LLC

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

While loan prices, weighted average spreads (WAS), weighted average rating factors (WARF) and diversity scores are important credit risk indicators, they have limited correlations with managers’ excess returns. For the latest three months through August, loan portfolios’ weighted average price was the major contributing factor to the return performance (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 84 managers through August 2023.
Source: INTEX, Markit, Santander US Capital Markets LLC.

The rankings

For the three months ending in August, Guggenheim, Generate Advisors, Hayfin, Oaktree 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 August

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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