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Global credit funds & CLO's
January 2024 | Issue 261
Published in London & New York.
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February 2024 | Issue 261
Analysis Funds
A strong year for CLO strategies
Tom Davidson
Managing editor
Kellie Ell
Reporter
Shant Fabricatorian
CLOs
Our universe of credit funds put past pain behind them to deliver impressive returns in 2023. But which strategies were the best performers, and how did they achieve such good numbers?
After the pain of 2022, credit fund managers must have been praying that 2023 turned out better. It did. Even ignoring the outrageously good returns for CLO funds (we’ll return to the 23% median return for that strategy later), most of our fund categories had a good year. Our indices for credit multi-strategy funds, corporate long-short funds , structured finance funds and European high-yield funds all posted 12-month returns from 12-13%, while US high yield funds were only a little behind on 10.4% for the year.
Top 4 Creditflux indices: cumulative returns 2023 (%)
As of 1-Dec-2023, source: Intex, CLO Research
Lupus Alpha leads the way
When you move beyond averages to the market’s outperformers, the successes really jump out. Our top 30 funds for 2023 start at a 19.5% 12-month return, and go as high as 45% for Lupus Alpha CLO Opportunity Notes II.
All CLO vehicles benefited from being floating-rate investments in a high-rate environment, and this combined with a dramatic rally in valuations to deliver strong passive performance. But Lupus Alpha clearly made some good decisions.
“Performance in our mandates in 2023 has been a result of our actions being taken before [the Ukraine and inflation] crisis (raising cash) and in market periods of stress (adding junior mezz bonds),” says Stamatia Hagenstein, co-portfolio manager with Michael Hombach at Lupus alpha Asset Management for CLO investments.
Lupus Alpha invested in a mixture of short, clean, out-of-reinvestment equity, long cash-flowing equity and junior mezzanine bonds, which were added at attractive prices. Equity positions narrowed the discount between their market value NAV and adjusted par value.
“Out-of-reinvestment period equity pieces benefited from the fact that they hadn’t been trading with a premium before the crisis. Deals within their reinvestment period added value due to trading and increase of WAS driven by amend and extend activity, while the increase in rates added an equity-like coupon payment for our junior mezz bonds, which could be acquired at attractive prices during periods of market stress,” says Hombach.
Hagenstein adds: “We would describe our current investments as being conservatively positioned if volatility returns to the market but still able to add value, as you will probably see in the early returns of 2024.”
*Estimates
45%
12-month return for Lupus Alpha CLO Opportunity Notes II
Strong returns in corporate long-short
Beyond CLO funds, the other category to stand out was corporate long-short. As mentioned, the category index achieved a middling full-year return of 12.45%, but that hides a number of high performers. Funds from Axiom and Blueglen came third and fourth across all our funds, with returns of 36.58% and 34.36%, respectively.
Funds following risk averse strategies also outperformed. Serone’s Key Opportunities Fund was our best-performing structured finance fund, with a full-year return of 22.79%. According to Serone, it rotated capital into safe positions through the year, which improved returns while increasing downside protection. The fund also generated a cash-on-cash yield of more than 20%.
Chief investment officer Serj Walia says: “Over the last 12 years the fund has provided investors with a circa 15% net annualised return with only one down year.”
Eagle-eyed readers may have already spotted that winners in a number of other categories were boosted by CLO exposure. For example, Flat Rock Global had the best performing US high yield fund, which CIO Shiloh Bates attributes to the mix of investments. “A majority of investments are middle market loans, owned alongside a mix of other debt securities, some of which are CLOs,” he says.
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