By the Numbers

CLO managers with stronger loans deliver another win

Caroline Chen | October 13, 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 loan portfolio through September delivered risk-adjusted returns that finished slightly behind the Morningstar/LSTA index. But managers running portfolios with less risk than the index finished ahead and continued to top their peers, as they have for at least the last 12 months. A small subset of managers delivered excess return for the fifth straight quarter.

Managers’ performance lost to the index by 3 bp through September

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 4.32% for the three months ending in September. 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 4.40%, but managers weighted by AUM instead posted a return of 4.37%, leaving excess return at -3 bp (Exhibit 1).

Exhibit 1: The loss of managers’ loan portfolio to the index narrowed in 3Q

Note: 1) Each reporting period includes the most recent three months. For example, the reporting period ending in Sep-23 includes the average manager performance in the past three months ending on or before September 20, 2023. 2) The September reporting period data shows the average excess return relative to the Morningstar/LSTA total return index for 83 managers with five or more active deals.
Source: INTEX, Markit, Santander US Capital Markets LLC.

Out of the 83 managers, 40 outperformed the leveraged loan index, compared to 30 in the August reporting period and 26 in the July reporting period. Individual managers’ excess returns to the index ranged from a high of 64 bp to a low of -73 bp through September.

Performance all improved, but low-beta managers continue to prevail

The beta in the Santander US Capital Markets manager model, which measures managers’ loan portfolio risk profile, ranged from a high risk of 1.20 to a low risk of 0.88. High-beta managers, defined as those with a beta greater than or equal to 1.0, have underperformed the index most of the periods, but their loss to the index has narrowed by 11 bp since the July reporting period. For the three months through September, high-beta managers weighted by AUM trailed the index by 8 bp. By contrast, risk-averse managers recovered from a poor showing in the July reporting period to outperform the market through September by 5 bp (Exhibit 2).

Exhibit 2: Low beta managers continue to lead their peers

Note: Each reporting period includes the most recent three months. For example, the reporting period ending in Sep-23 includes the average manager performance in the past three months ending on or before Sept 20, 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 29 managers whose beta is no more than 1 with a median of 0.97.
Source: INTEX, Markit, Santander US Capital Markets LLC.

Ten managers outperformed the index each quarter from the third quarter of 2022 to the second quarter of 2023, but only five were able to extend their strong performance through the third quarter this year. In addition, King Street, Partners Group and Canyon Capital have shown an improving performance trend since October 2022 and generated strong performance through the third quarter as well (Exhibit 3).

Exhibit 3: Managers in the Spotlight

Note: Investcorp performance in 3Q 2023 included deals managed by Marble Point.
Source: INTEX, Markit, Santander US Capital Markets LLC

Loan attributes have a limited correlation with managers’ performance

In general, loan attributes have a very weak correlation with managers’ excess returns. For the past six reporting periods, loan portfolios’ weighted average price remained 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 September 2023.
Source: INTEX, Markit, Santander US Capital Markets LLC.

The rankings

For the three months ending in September, Guggenheim, Generate Advisors, Hayfin, Blue Owl, and Bardin Hill 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 September

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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