The team believes that a top-down, macroeconomic approach is key to understanding how changes in the drivers of three key variables – credit dynamics, interest rates and mortgage prepayment rates – impact underlying risks. They consider how the relative complexity of MBS instruments – through the various forms of securities, multiplicity of issuers and tailored nature of individual security features – presents opportunities to extract alpha.
The team aims to add value through actively exploiting the inherent inefficiencies of the more sophisticated US MBS strategies. A combination of top-down market analysis and fundamental, bottom-up security selection ensure risk is actively managed in a diversified portfolio. The team conducts market analysis to form views on a range of key variables, which determine the strategy’s allocation to different MBS market segments. The resulting portfolio features attractively priced bonds, complemented by derivatives for the active management of exposures to interest rate movements, credit risk and prepayment risk. The team continually reassesses the market and the portfolio across the market cycle, and focuses on risk management by seeking to isolate and hedge downside risks.
Form views on interest rate cycles, credit environment, prepayment expectations and housing market
Determine relative attractiveness of segments and conduct fundamental analysis of securities within segments
Diversified portfolio reflects views on credit risk, interest rate risk and prepayment risk
Ongoing risk management to review consistency with market views, exposure and diversification
The strategy was launched in 2002 and the team joined GAM in June 2014 from specialist MBS manager Singleterry Mansley Asset Management, based in New York.
The team’s depth of experience in all aspects of portfolio, trading and risk management, including derivatives creation and structuring, dates back to the origins of the MBS market as an investable asset class.
The depth of the team’s experience and strong skillset in assessing the impact of market, interest rate and credit cycles on residential MBS is evidenced by a 16 year strategy track record of steady, incremental returnsGary Singleterry, Investment Director.
All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.
If a counterparty to a financial derivative contract were to default, the value of the contract, the cost to replace it and any cash or securities held by the counterparty to facilitate it, may be lost.
Bonds may be subject to significant fluctuations in value. Bonds are subject to credit risk and interest rate risk.
Non-investment grade securities, which will generally pay higher yields than more highly rated securities, will be subject to greater market and credit risk, affecting the performance of the Fund.
The issuer of mortgage or asset-backed securities may not receive in full the amounts owed to them by un- derlying borrowers, affecting the performance of the Fund.
A rise or fall in interest rates causes fluctuations in the value of fixed income securities, which may result in a decline or an increase in the value of such investments.
Some investments can be difficult to sell quickly which may affect the value of the Fund and, in extreme market condi- tions, its ability to meet redemption requests.
Derivatives may multiply the exposure to underlying assets and expose the Fund to the risk of substantial losses.