Non-agency US mortgage securities might scream ‘risk’ to some, but for TCW Asset Management, they are the most compelling opportunity in the bond universe today.

The California-based manager began ramping up exposure to the non-agency mortgages – so-called because they are not guaranteed by the government-owned agencies Freddie Mac, Fannie Mae or Ginnie Mae – in early 2009, to the extent that at one stage it had a 50 per cent exposure to the sector in its flagship Total Return Fund.

According to TCW chief investment officer Tad Rivelle, visiting Australia last week, the price of the non-agency mortgage securities, which have unprepossessing names such as BOAM (related to Bank of America) and CWALT (related to Countrywide) have appreciated about 30 per cent in the period since TCW became bullish.

Rivelle said the non-agency mortgages could still be bought at 50 cents on the dollar, and did not incur the risk of rapid pre-payment from which agency mortgages were currently suffering, given the low level of US interest rates.

Rivelle said TCW was comfortable sitting outside the US fixed interest “oligopoly” of PIMCO, BlackRock and Western Asset Management.

“When you’re a $1 triilion firm, a lot of your value-add is down to macro calls, you know you’re long or short interest rates, you’re bullish on emerging markets or you’re not.”

Rivelle said TCW was nimble enough to make meaningful investments in a sector like Enhanced Equipment Trust Certificates, which are bankruptcy-remote vehicles that lease planes to America’s notoriously troubled airlines.

“You need to do your homework to work out which EETCs are the good ones, but at $5 million to maybe $15 million per investment, you probably wouldn’t bother if you were one of those three huge institutions,” he said.

TCW product is represented in Australia via an arrangement with Amundi Asset Management.

Leave a comment