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Mortgage Backed Securities – Tom Mansley

Tom Mansley reflects on strong house prices despite the rise in rates, and highlights the stability and yield offered by the asset class.

What were the major recent events and impacts on your asset class?

Well, the most significant events of the second quarter were, first of all, the Federal Reserve (Fed) pausing in its interest rate rise program – we think that they're almost done, but not quite, so there'll be a little more left to do to the sticky inflation and more specific to our strategy, the stabilisation of home prices in the United States. Home prices were up again the prior month, which brings them to relatively flat on a 12-month basis and only down about 2% from the absolute peak back in June of 22, which is consistent with what we've been saying and what we continue to think, which is that the rise in rates causes an affordability problem that's going to push prices down slightly. However, there is a tremendous amount of demand, very little supply, and that's going to dominate the medium to long term. And that's why we're seeing the stabilisation after even such a mild decline and we think that we're back into that nice, stable home price zone again.

What can your asset class offer in the current environment?

Well the asset class tends to generate very stable underlying cash flows. In general, the portfolio composition that we have today, which consists of very seasoned mortgages, makes that even more so. So, the really stable underlying cash flows in a time of potential instability, which is where we are today and across various financial markets, means that this asset class can provide that low vol, nice yield, the stability that a lot of people are looking for and in a non-correlated manner versus other assets.

What is your outlook in the near and medium term?

The outlook is that this is a very good time to collect yield. The portfolio today yields in excess of 7% and we're going to be very happy to collect that yield, particularly since we're able to do that with a very conservative portfolio. And when I say that, what I mean is we're not concerned about recession potential or anything of that nature because the very seasoned nature of the underlying assets means we have a very high house prices versus the purchase because the purchase was 15 years ago. Also, the loan amount is much smaller today, so the loan is secured by a very high value asset. Also, the borrowers have that demonstrated ability to pay and they have been doing so through prior recessions such as the Great Financial Crisis. Put that together with the fact that over 95% of the portfolio is the most senior claim in the capital structure. So we have a lot of senior bonds in the portfolio, which means you are first in line to get all of your principal, all of your interest. That's the kind of conservative portfolio we put together, which means I think it's time to collect some really good yield.

Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein 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 contained herein. Past performance is not an indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.

No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Past results are not necessarily indicative of future results. Investors could lose some or all of their investments.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.

This presentation contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

Tom Mansley

Investment Director

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