By the Numbers

CLO manager returns continue to trail the broad market

| December 8, 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’ risk-adjusted loan portfolio total returns have trailed the broad market in each reporting period since June, and the latest one is no exception.  Although their shortfall to the leveraged loan index narrowed through November, managers have generally underperformed this year. The performance difference between managers of low-risk loan portfolios and high-risk loan portfolios has also been discernible throughout the year, with low-beta managers outperforming their peers in every reporting period.  Additionally, the list of managers that consistently delivered positive excess returns continue to narrow.

Managers’ performance lost to the index by 9 bp through November

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 2.31% for the November 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 2.36%, but managers instead posted an AUM-weighted return of 2.27%, trailing the index by 9 bp (Exhibit 1).

Exhibit 1: Managers’ performance remains lackluster

Note:  1) Each reporting period includes the most recent three months.  For example, the reporting period ending in Nov-23 includes the average manager performance in the past three months ending on or before November 20, 2023.   2) The November 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.

Individual managers’ excess returns to the index ranged from a high of 43 bp to a low of -104 bp through November.

Low-beta managers continue to lead, but very few can 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—those with a beta greater than or equal to one—have historically underperformed the index and lost to the index by a weighted average of 13 bp through November. Low-beta managers, on the other hand, had a 1 bp loss to the index in the same period, which improved from the last reporting period (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 Nov-23 includes the average manager performance in the past three months ending on or before November 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 0.98.
Source: INTEX, Markit, Santander US Capital Markets LLC.

From the fourth quarter of 2022 through the third quarter of 2023, eight CLO managers had outperformed the index each quarter. However, only Oak Hill and Generate Advisors were able to extend their strong performance into October and November. In addition, TCW, although trailing the index in the last quarter of 2022, have delivered strong performance this year (Exhibit 3).  All three managers are low-beta managers.

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

Out of the eight managers that had consistently outperformed the broad market in the last four quarters, Investcorp and Canyon Capital have shown weaker performance recently.

Loan prices correlate to excess returns through November

Loan attributes generally have weak correlations with managers’ excess returns. For the three months through November, loan portfolios’ weighted average price showed the highest correlation to managers’ return performance (Exhibit 4).

Exhibit 4: Loan prices may help managers’ 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 83 managers through November 2023.
Source: INTEX, Markit, Santander US Capital Markets LLC.

The rankings

For the three months ending in November, Blue Owl, Generate Advisors, Steele Creek, Ares, and Hayfin 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 November

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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