By the Numbers

A few winners in a year of lackluster performance

| January 19, 2024

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 underperformed the broad leveraged loan market most of the time in 2023 but managed to tie the market in the final reporting period of the year. For the three months through December, managers’ risk-adjusted total return on their loan portfolios matched the index. Managers with lower-risk loan portfolios nevertheless outperformed both the index and their peers running higher-risk portfolios.

Managers’ performance was on par with the index through December

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 2.19% for the three months ending in December. 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 2.23%, and managers weighted by assets under management delivered exactly that return (Exhibit 1).

Exhibit 1: Managers’ performance was lackluster most time of the year

Note:
1) Each reporting period includes the most recent three months.  For example, the reporting period ending in Dec-23 includes the average manager performance in the past three months ending on or before December 20, 2023.
2) The December 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.
Source: INTEX, Markit, Santander US Capital Markets LLC.

Out of the 82 managers, 42 outperformed the leveraged loan index, compared to 29 in the last reporting period and 24 in the October reporting period. Individual managers’ excess returns to the index ranged from a high of 35 bp to a low of -47 bp through December.

Low-beta managers have been leading, and the best-performer list is short

The beta in the Santander US Capital Markets manager model, which measures the loan portfolio risk profile, ranged from a high risk of 1.18 to a low risk of 0.88 for managers. Higher-beta managers—those with a beta greater than or equal to one—have historically underperformed the index and lost to the index again through December by a weighted average of 5 bp. Managers running lower-risk portfolios with a beta less than 1.0, on the other hand, outperformed the index by 10 bp in the same period (Exhibit 2).

Exhibit 2: Low beta managers led their peers through 2023

Note:  Each reporting period includes the most recent three months.  For example, the reporting period ending in Dec-23 includes the average manager performance in the past three months ending on or before December 20, 2023.   The high beta group includes 52 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.

In 2023, nine CLO managers had outperformed the index each quarter.  Except for Partners Group and Irradiant partners, all are low-beta managers (Exhibit 3).

Exhibit 3: A list of best performers in 2023

Source: INTEX, Markit, Santander US Capital Markets LLC

There are additional 12 managers whose performance lost to the index in one out of the four quarters, nevertheless, delivered positive excess returns on a trailing 12-month basis (Exhibit 4).  More than half on this list are low-beta managers as well.

Exhibit 4: A list of managers outperformed in three out of past four quarters

Source: INTEX, Markit, Santander US Capital Markets LLC

Loan prices may contribute to the excess returns through December

Loan attributes generally have weak correlations with managers’ excess returns. For the three months through December, loan portfolios’ weighted average price remains a major contributing factor to managers’ return performance (Exhibit 5).

Exhibit 5: 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 82 managers through December 2023.
Source: INTEX, Markit, Santander US Capital Markets LLC.

The rankings

For the three months ending in December, American Money Management, Ares, Palmer Square, Oakhill, and Clover 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 6).  A complete list of managers and their returns is here.

Exhibit 6: CLO manager performance for the three months ending December

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

Exhibit 7: 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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