By the Numbers

CLO mangers score a small win through February

Caroline Chen | March 8, 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. This material does not constitute research.

CLO managers eked out a win over the broad leveraged loan market index for the three months ending in February. The win follows eight reporting periods where managers trailed the market. Managers that run portfolios with risk below the broad market average continued to post better returns that managers running risk above the market average. Some familiar names continued to post the strongest excess returns among their peers.

Managers’ performance topped the index by 1 bp through February

After accounting for CLO reporting dates, the Morningstar/LSTA leveraged loan index returned 3.32% for the three months through February. 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 3.38%, but managers weighted by assets under management delivered a return of 3.39%, adding 1 bp of excess return (Exhibit 1).

Exhibit 1: Managers’ loan portfolios performed slightly better than the index

Note: 1) Each reporting period includes the most recent three months. For example, the reporting period ending in Feb 2024 includes the average manager performance in the past three months ending on or before February 20, 2024. 2) The February reporting period data shows the average excess return relative to the Morningstar/LSTA total return index for 85 managers with five or more active deals.
Source: INTEX, Markit, Santander US Capital Markets LLC.

Out of the 85 managers tracked, 40 outperformed the leveraged loan index. Individual managers’ excess returns to the index ranged from a high of 58 bp to a low of -67 bp through February.

High-beta managers underperformed, but their losses to the index have declined

The manager beta in the Santander US Capital Markets manager model, which measures the loan portfolio risk profile, ranged from a high risk of 1.18 to a low risk of 0.88 for managers. High-beta managers—those with a beta greater than or equal to one—underperformed the index most of the time in the last 12 reporting periods, but their losses to the index narrowed to a weighted average of 3 bp through February. Low-beta managers, on the other hand, topped the index by 8 bp in the same period (Exhibit 2).

Exhibit 2: High-beta managers’ losses to the index have narrowed

Note: Each reporting period includes the most recent three months. For example, the reporting period ending in Feb-24 includes the average manager performance in the past three months ending on or before February 20, 2024. 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 31 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 started 2024 with mixed performances (Exhibit 3).

Exhibit 3: Top performers in 2023 had mixed performance year-to-date

Source: INTEX, Markit, Santander US Capital Markets LLC

Additionally, American Money Management, which outperformed the broad market in the last two quarters of 2023, has maintained its strong performance into 2024 (Exhibit 4).

Exhibit 4: American Money Management has shown strong performance recently

Source: INTEX, Markit, Santander US Capital Markets LLC

Loan attributes have weak correlation with managers’ excess returns

Loan attributes generally have weak correlations with managers’ excess returns. For the three months ending in February, the weighted average loan spread and diversity score had a slightly stronger correlation with managers’ excess returns (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 85 managers through February 2024.
Source: INTEX, Markit, Santander US Capital Markets LLC.

The rankings

For the three months ending in February, Bardin Hill, Crescent Capital, Elmwood, American Money and PPM America 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 February

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

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.