By the Numbers
Manager excess returns trail the loan market through October
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.
CLO managers’ loan portfolio performance has trailed the broad market in most periods this year, and the latest reporting period was no exception. After adjusting for risk and reporting dates, even managers with low-risk loan portfolios underperformed through October. And the list of managers consistently beating the index lost a few names in the latest period, with a few managers trailing the index after delivering positive excess returns in the last four quarters.
Managers’ excess returns trailed the loan index by 12 bp through October
After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 2.85% for the three months ending in October. 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 2.91%, but managers instead posted a return weighted by AUM of 2.79%, trailing the index by 12 bp (Exhibit 1).
Exhibit 1: Managers lost to the index five times in a row
Note:
1) Each reporting period includes the most recent three months. For example, the reporting period ending in Oct-23 includes the average manager performance in the past three months ending on or before October 20, 2023.
2) The September reporting period data shows the average excess return relative to the Morningstar/LSTA total return index for 82 managers with five or more active deals. Deals managed by Gulf Stream are reported under Apollo.
Source: INTEX, Markit, Santander US Capital Markets LLC.
Out of the 82 managers tracked, only 24 outperformed the leveraged loan index, compared to 40 in the September reporting period, and 30 in the August reporting period. Individual managers’ excess returns to the index ranged from a high of 82 bp to a low of -49 bp through October.
Very few were able to keep the winning streak
The beta in the Santander US Capital Markets manager model, which measures managers’ historic 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, lagged the index by a weighted average 14 bp for three months through October. Additionally, risk-averse managers, those with a beta less than 1.0, also lost to the index by 6 bp (Exhibit 2). Risk-averse managers, on the other hand, posted positive excess returns in six out of the last 10 reporting periods, whereas high-beta managers only outperformed twice in the same periods.
Exhibit 2: Low beta managers had a lackluster performance through October
Note: Each reporting period includes the most recent three months. For example, the reporting period ending in Oct-23 includes the average manager performance in the past three months ending on or before October 20, 2023. The high beta group includes 53 managers whose beta is over or equal to 1 with a median of 1.04. 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.
Eight managers outperformed the index each quarter from the fourth quarter of 2022 through the third quarter of 2023, but only three were able to extend their strong performance into October. In addition, loan portfolios from Irradiant Partners and Fortress have shown improving performance trends, despite their loss to the index in the fourth quarter of 2022 (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
Less liquid loans may help to contribute to excess returns
In general, loan attributes have shown a weak correlation with managers’ excess returns. The correlation between bid depth and excess returns, however, was a negative 0.4, the highest in recent reporting periods, implying that less liquid loans may help in managers’ performance. The market price of less liquid loans may stay high when the broad market suffered spread widening in October. Managers who outperformed the index through October may have more illiquid loans in their portfolios than their peers (Exhibit 4).
Exhibit 4: Bid depth had a stronger correlation with excess returns
Note: Data shows the correlation of each measure, calculated across each manager’s outstanding deals, with excess return or alpha as measured for 82 managers through October 2023.
Source: INTEX, Markit, Santander US Capital Markets LLC.
The rankings
For the three months ending in October, Hayfin, Generate Advisors, Bardin Hill, Fortress, and Guggenheim 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 October
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
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
