By the Numbers
Another month where risk gets rewarded for CLO managers
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.
The average CLO leveraged loan portfolio gained 0.97% for the three months ending in May but, after adjusting for broad market exposure, or beta, fell behind the market by 4 bp. Managers who held riskier loans delivered more excess return in the last three months, continuing a trend that has run for more than a year. Nassau, Symphony, Sculptor, ZAIS and Seix led the pack among managers with five or more active deals.
After accounting for the various reporting dates of managers, the S&P/LSTA Leveraged Loan Total Return Index gained 0.93% between March and May. Managers held portfolios with an average beta of 1.03, which meant the average manager should have gained 1.01%. With the actual average performance at 0.97%, the average manager trailed the index by 0.04%.
About 38% of the managers led the index, a small drop from the figures reported by Amherst Pierpont last month (Exhibit 1). Out of the 68 managers with five or more active deals tracked for March through May, four delivered excess return greater than 30 bp, while eight trailed the index by at least 30 bp.
Exhibit 1: Around 38% of managers outperformed the index between March and May
Note: data shows excess return only for active deals.
Source: Amherst Pierpont Securities.
The bid depth and weighted average price of the portfolio correlated most strongly with recent excess returns (Exhibit 2). Managers who held loans that were less liquid or had lower prices delivered higher returns. Additionally, more exposure to the lowest rated loans correlated with more recent excess returns. Diversity or second-lien exposure of the portfolio bore little relation to their recent outperformance.
Exhibit 2: Correlation of portfolio or manager features with recent excess return
Note: data shows the correlation of manager or loan portfolio attribute with managers’ excess return or alpha from March through May only on active deals. Portfolio attributes measured as percentiles.
Source: Amherst Pierpont Securities.
As the leveraged loan market has rallied, the spread gap between ‘B-’ and ‘B’ loans has plummeted to its tightest level since the beginning of 2015 (Exhibit 3). Consequently, managers who held more ‘B-’ loans benefited more from their price appreciation between March and May.
Exhibit 3: Demand for higher-yielding paper compressed the spread gap between ‘B’ and ‘B-’ loans
Sources: LCD, Amherst Pierpont Securities.
The following managers delivered excess returns on their loans portfolios between March and May (Exhibit 4). Nassau, Symphony, Sculptor, ZAIS and Seix, make up the Top 5.
Exhibit 4: Alpha leaders in CLO portfolio performance March–May 2021
Note: Performance for managers with five or more deals tracked by APS. 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 S&P/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 each manager’s active deals weighted by the average deal principal balance over time. Any difference between performance attributable to beta and actual performance is attributed to manager alpha.
Source: Amherst Pierpont Securities.
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