By the Numbers

CLO mangers score a small win through February

| 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.

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

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