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Large CLO managers outperform their smaller peers

Size does matter according to our latest research on US CLO manager performance. It is reasonable to assume that larger managers are buying into the market, which may make it unlikely for them to perform well. However, upon analyzing the average alpha performance* in each category, larger US CLO managers have consistently outperformed their smaller counterparts.

We looked at a sample of 313 seasoned deals (2016–2019 vintage deals) managed by 57 US CLO managers is included in this study. The benchmark loan index used is the Morningstar LSTA US B-BB Ratings Loan Index.

The chart above displays the average trends of total return alpha* for each group of US CLO managers categorized by their CLO AUM (as of 30 June 2023).

As of 11 July 2023, the average alpha performance of managers with over $16 billion AUM was close to 20bp, as shown by the blue line. The orange line represents the trend of managers with an AUM between $7 billion and $16 billion, with an average alpha of 5bp as of the last reading. Both groups of managers have demonstrated fairly resilient performance throughout the COVID pandemic. On average, these managers have outperformed the loan index since mid-late 2020, as indicated by the alpha lines consistently remaining in positive territory.

On the other hand, the average alpha performance of managers with an AUM between $2.5 billion and $7 billion has experienced significant volatility and dispersion over the last few years. For instance, following the loan market crash in late March 2020, these managers significantly underperformed the loan index by a wide margin. In April 2020, their average alpha plummeted to a low of around -109 basis points (bp), indicating that, on average, they underperformed the loan index by 109bp. However, as the market recovered, these managers showed a strong rebound in performance, as evidenced by their positive performance in 2021. By July this year their performance was largely in line with the loan index.

To provide context, managers typically receive a total management fee of around 40bp, which includes both senior and subordinated fees.

These findings suggest that, in general, size does provide an advantage in the US CLO market, as reflected in the average alpha performance trends. However, it is important to note that there are managers in each of the three categories who have demonstrated strong performance as well as underperformance.

* In order to calculate the total return alpha for each deal, the gross collateral total return is determined for specific periods, spanning from the deal’s closing date to the end date of each period. This calculation involves compounding the portfolio’s monthly (or periodic) return since the closing date. Once the total portfolio return is obtained, it is annualized to determine its annualized value. The difference between this annualized total return and the annualized total return of the Morningstar LSTA US B-BB Ratings Loan index represents the total return alpha, which is depicted here.