Will Wainewright

11/05/2011 Author: Will Wainewright

MBS returns, with a new emphasis on the detail

The financial Armageddon of 2008 may have killed off the origination of fresh mortgage-linked products, but existing mortgage-backed securities (MBS) are enjoying a new lease of life. Written off as valueless in 2008, a more analytical breed of manager can now enjoy success by sorting the wheat from the chaff.

Managers in this space tell HFMWeek the near-abandon with which securitisations were purchased previously, with little examination of the underlying assets, has long gone. After the failure of the ratings agencies, the onus is on the chastened investor to make their checks.

Mike Chacos, CEO of US subprime specialists Wye Tree Asset Management, says the level of analysis has increased massively. “If you understand the securitisation and the underlying assets – the mortgages and properties – it gives you a great deal of insight into how your investment is likely to behave through time. We are constantly asking: ‘Is this behaving the way I expected it to?’”

So far, this strategy is working. The top ten MBS funds measured by BarclayHedge made average gains of 43% this year. This recent run of performance in the MBS market leads Clayton DeGiacinto, CIO at New York investment firm Axonic Capital, to agree that research defines success: “When credit assets are uncorrelated, it becomes a bond picker’s market and that’s what I think we’re in.”

Lessons, it seems, have been learned – and complacency scrapped. The MBS market remains one to watch but the mistakes of just a few years ago do not look as if they are being repeated.

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