By the Numbers

CLO managers trail the market, but low beta does better

| February 9, 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.

Total returns on CLO managers’ loan portfolios in the three months ending in January fell slightly short of the broad leveraged loan market. A few managers with strong performance last year lost steam in January, perhaps with the exception of Elmwood. And managers with low-risk loan portfolios continued to lead their peers.

Managers trailed the market index by 1 bp through January

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 3.38% for the three months through January. 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 3.45%, but managers weighted by assets under management just delivered a return of 3.44%, slightly behind the index (Exhibit 1).

Exhibit 1: Managers’ performance trailed the broad market by a thin margin

Note:(1) Each reporting period includes the most recent three months.  For example, the reporting period ending in Jan 2024 includes the average manager performance in the past three months ending on or before January 22, 2024. (2) The January 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 tracked, 37 outperformed the leveraged loan index. Individual managers’ excess returns to the index ranged from a high of 49 bp to a low of -154 bp through January.

Low-beta managers continue to lead, but their performances weakened

The manager beta in the Santander US Capital Markets manager model, which measures the loan portfolio risk profile, ranged from a high risk of 1.19 to a low risk of 0.88. High-beta managers—those with a beta greater than or equal to 1.0—have historically underperformed the index and lost to the index by a weighted average of 4 bp through January.  Risk-averse managers, on the other hand, outperformed the index by 9 bp in the same period (Exhibit 2).

Exhibit 2: Low beta managers led their peers in each of the past twelve periods

Note:  Each reporting period includes the most recent three months.  For example, the reporting period ending in Jan-24 includes the average manager performance in the past three months ending on or before January 22, 2024.   The high beta group includes 55 managers whose beta is over or equal to 1 with a median of 1.04. The low beta group includes 27 managers whose beta is no more than 1 with a median of 0.97.
Source: INTEX, Markit, Santander US Capital Markets LLC.

In 2023, nine managers outperformed the index each quarter.  But except for Elmwood, the remaining managers’ performances in January all trailed that of the leveraged loan index (Exhibit 3).

Exhibit 3: Top performers in 2023 lost to the index in the first month of 2024

Source: INTEX, Markit, Santander US Capital Markets LLC

Two managers, American Money Management and Invesco, are worth highlighting. Each one outperformed the broad market in the last two quarters of 2023 and has maintained strong performance into January (Exhibit 4).   Both American Money and Invesco have low-risk loan portfolios.

Exhibit 4: Spotlight two managers with improved performances

Source: INTEX, Markit, Santander US Capital Markets LLC

Loan prices remain the largest contributor to managers’ excess returns

Loan attributes generally have weak correlations with managers’ excess returns. Loan prices have recently shown an increasing correlation with managers’ excess returns and remain to be a major contributing factor to managers’ return performance through January (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 January 2024.
Source: INTEX, Markit, Santander US Capital Markets LLC.

The rankings

For the three months ending in January, Clover, American Money Management, Elmwood, Onex and Oaktree 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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