6 February 2019
If a pendulum goes past the centre of gravity on one side, it must go a like distance on the other.
“In the fixed income arena, asset prices have been heavily influenced by government policies and central banks for a number of years, and the pendulum has swung too far.” That is the opinion of Tom Mansley, who co-manages GAM Investments’ flagship USD 1 billion + mortgage-backed securities (MBS) strategy.
“Did you know that, in the US, the MBS market is bigger than that of corporate bonds?” It is certainly an interesting starting point for a discussion and Tom went on to point out that MBS accounts for about 24% of the US fixed income arena – the second-largest segment behind US Treasuries.
Tom is a numbers man, which is evident from the fact that he owns three separate HP 12-C programmable calculators. “The one I have in my hand has my initials carved in it” he points out. “The only place that you can fit them in is the gap between the screen and the HP logo. A long time ago, I used to make markets in mortgage derivatives, such as interest-only strips. Everyone on the trading desk around me used an HP 12-C, so you had to make sure you safeguarded your own.
"What I like best about them is the ability they give you to perform reverse polish notation, which doesn’t require the use of brackets - so you can just carry on and on with a complex calculation, producing stack after stack of numbers.
“I’ve always loved math – I graduated with a BS in mathematics and computer science and completed my MBA at Pace University. Then, after I started work, I studied for an MS degree in mathematics at the Courant Institute of New York University.”
So, what is it about the MBS market that continues to enthral a mathematician after 24 years of specialised experience?
"There is a lot of math in the mortgages market. In collateralised mortgage obligations (CMOs), for example, the mortgage pool is divided into tranches with different income and risk profiles. Similarly, stripped instruments separate cash flows from interest and principal payments and securitise them individually. The complexity and sophistication of these instruments means that objective evaluation requires technical expertise and mathematical skills. However, it is important to remember that the market is based on a very simple pretext – investors absorb the risks associated with repayment and prepayment in return for receipt of the associated cash flows. The complexity lies in understanding the models, which is not a problem for me as I used to create them.”
Tom struggles to recall his first day of his professional career at Chase Asset Management (now JP Morgan) but becomes more animated when moving on to talk about his first work experience.
"At 14 years of age, we were permitted to work a limited number of hours as long as we had our ‘working papers’ signed off by the School Principal. So, I started working early on and had many different jobs, but one of my favourites was working for Baskin Robbins, selling ice-cream.
"The bad aspect of working in the food services sector is the remuneration. Employers are legally able to pay less than the minimum wage because employees are expected to receive tips. But, obviously, I didn’t get any tips as an ice-cream seller. What I liked best about the job was that I made people happy because all my customers wanted an ice cream, which is what I gave to them!
"By the end of high school, I had my own landscaping business. I come from an entrepreneurial family and my grandfather opened an appliance store, which became very profitable as the Great Depression came to an end. Ironically, the store was forced to close during the post-crisis recession of 2009, so it is just as well that I pursued a career in capital markets.”
And what has been the highlight of your career?
(Pause for reflection). “The biggest sense of accomplishment I have enjoyed during my career is building up the business Singleterry Mansley Asset Management, which was absorbed into GAM Investments in 2014. It was started by my friend and colleague Gary Singleterry and together we had grown to our AUM to over USD 400 million by the time we attracted the attention of GAM.
"The thing is that, when it is just you and your partner, you can end up wearing an awful lot of hats…Chief Financial Officer, Chief Investment Officer, Chief Operating Officer, Head of Sales to name but a few. So at this stage of our careers, we are both happy to autonomously get on with what really makes us tick within GAM Investments’ supportive framework.”
Surely, a professor of mathematics…?
"Actually, if I wasn’t a fund manager, I would like to be in the medical profession. Although, at the age of 50, I readily acknowledge that a change in direction to a career requiring so many years of training is not realistically on the agenda.
"However, the training to become an emergency medical technician (EMT) is significantly less, so I completed that programme and rode on a volunteer ambulance in my town each Tuesday night until a few years ago. This partly explains how I got involved in the charity Nova Hope for Haiti.
"The charity started in 2002, sending a volunteer medical mission twice a year to a remote village on the southern edge of the Haitian peninsula. During each mission, a temporary clinic would be staged for a week, treating around 1,000 patients. Nowadays, NOVA operates two full-time clinics with fully stocked pharmacies and labs out of two facilities in Haiti: Our newest building is in Cavaillon and we have another clinic in Boileau. These are staffed with two doctors, five nurses, lab technicians, pharmacists and other support, such as ground-keeping and security. The management of staff in such a remote location is clearly challenging and requires regular visits by our teams at Nova Hope. Consequently, I am frequently quizzed by customs officers as to why my passport has so many Haiti stamps in it!
"Nova Hope supplies its patients with wholesale medicines imported from Amsterdam, which allow us, for example, to treat children with intestinal worms for little more than a dollar. We have also installed a well that provides a source of clean drinking water which helps to reduce infant mortality rates. I still fall back on my EMT experience on my regular trips to Haiti, where I can prepare patients for seeing the doctor by measuring and recording their vitals etc.
"However, when I visited in May 2017 the primary purpose of the trip was to assess the progress of efforts to rebuild our community after the destruction caused by Hurricane Matthew. We purchased crop seeds and banana trees to re-establish the agriculture and repaired or rebuilt homes near our clinic. A little bit of money can go a long way in Haiti. For example, the house in the picture was totally destroyed and the complete rebuild only cost USD 2,600.
"One of the houses we rebuilt was one mile from our clinic up on the side of a mountain. It finally disintegrated at 2 o’clock in the morning, and the mother of five led her children down the mountain, in total darkness and 150 mile per hour winds, to shelter at our clinic for the remainder of the storm. They thank us for the medical care that we provide, and we thank them for showing us the true meaning of courage and strength.
"I am Treasurer of NOVA and my wife is Vice President, so it is a cause we are both committed to and enjoy getting involved in. I met my wife in grad school and I frequently remind my two kids (the elder is pursuing a PhD at Northwestern University, while the younger one is attending Lehigh University) that educational establishments are a much better place to forge lasting relationships than a bar!”
Tom is obviously a passionate man, retaining all his enthusiasm for his day job as well as his family and outside interests, and is genuinely excited by the opportunities that lie ahead.
"At this point in time, the influence of government policy and central bank deliberations on fixed-income markets is finally beginning to recede. The next phase of market action is likely to see market forces reassert and a restoration of a more normal order. As market manipulation fades further, fundamentals will once more dictate which securities rise in price and which fall.
"We should welcome this stage of the cycle, as the unintended consequences and social costs that have arisen as a by-product of central bank market manipulation simply could not have been allowed to continue for much longer. Far too many vulnerable people have placed their retirement savings in high-yield bonds because they cannot get by on the income from higher-rated paper without dipping into their capital.
"We see considerable grounds for optimism in the mortgage-related markets. Most post-crisis securities are more investor friendly than they were pre-crisis. The amount of subordination required for any given rating is substantially higher on post-crisis MBS, and for many structured securities, the Dodd-Frank regulations also require the issuer to retain a 5% interest in the security they sell. Another aspect of the Dodd-Frank Act is that it compels originators to ‘make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling.’
"Another point worth bearing in mind is that, when the pendulum swings as far as it has, frequent mispricing occurs, particularly in the more complex segments of the mortgage market which are often overlooked. It is our job to identify and take advantage of such valuation anomalies accordingly.”
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.