U.S. Mortgage Strategy
U.S. Mortgage Strategy

U.S. Mortgage Strategy

 
 
 
Summary

The U.S. Mortgage Strategy seeks a high level of current income, by investing in a diversified portfolio of mortgage-related securities. To help achieve this objective, the strategy invests in mortgage-related securities such as mortgage pass-through securities, mortgage-backed securities, asset-backed-securities, collateralized mortgage obligations and commercial mortgage-backed securities.

+/- 0.5
Duration Band
200-300
Typical Number of Holdings
100%
Rated Investment Grade
 
 
Investment Approach
Philosophy

The team employs a value-based investment philosophy. They believe that bond prices reflect market forecasts for a variety of factors, such as economic growth, inflation, credit risk and prepayment risk, but that markets tend to be poor indicators of future events, especially when the implied market forecasts are at extreme levels.

As a value manager, the team seeks to identify situations where the market’s implied forecasts are extreme, and position the strategy to capture the potential value inherent in these situations. In order to capture these opportunities, the team is strongly committed to research and a disciplined, team-based investment process.

 
Differentiators
Integrated investment approach:

The team’s investment approach integrates strong qualitative analysis with comprehensive quantitative valuation tools at every stage of the investment process, providing a robust credit management process. Investors have expertise across “consumer behavior-driven” securities, such as MBS, CMBS CMOs and ABS.

Global research:

An emphasis on a team-based approach to research and investment allows investors to benefit from the combined insight and expertise of Morgan Stanley Investment Management’s (MSIM’s) Global Fixed Income team. Approximately 80 percent of MSIM’s research is generated in-house and is supplemented by Morgan Stanley sell-side and third-party research.

Research and portfolio management:

Strategic investment decisions are made by an experienced investment team who continually conduct research to be at the forefront of fixed income analysis and are thought leaders in this field. Opinions from all members of the team are debated to ensure that portfolios reflect the team’s best ideas.

 
 
 
Investment Process
1
Top-Down review:

The team is focused on determining where the market stands at each stage of the cycle. To help accomplish this, they evaluate macroeconomic factors such as employment, inflation, corporate/consumer credit and interest rate cycle.

2
Sector Allocation:

Transaction prices for securities of all mortgage-related products are captured by the team’s proprietary security market pricing database. Securities are segmented by product type, weighted average life/duration and credit stability. Expected cash flows of each bond are then projected using prepayment and credit-loss models. Finally, price/yield and weighted average life/duration profiles are derived from the models for each bond to help determine whether the bond is trading on a relatively rich, cheap or fair basis.

3
Security Selection:

The team’s experienced portfolio managers and traders purchase securities that best fit investment targets. Based on its value identification process that incorporates rigorous analyses and modeling, the team collects and prioritizes investment opportunities. They then determine if the identified securities fit the risk, philosophy, guidelines and maturity profile of the portfolio.

4
Risk Management:

Proprietary risk management and attribution systems allow the team to measure and manage portfolio risk on a daily basis, and help assess the impact of key investment decisions on investment performance. The team conducts monthly credit surveillance and generates collateral reports of prepayment and credit conditions, which allows them to review positions and decide if there is a need to amend the investment thesis.

 
 
Portfolio Managers
Managing Director
25 years industry experience
Managing Director
32 years industry experience
Chief Investment Officer of Global Fixed Income
29 years industry experience
 
 
Insights
Investment Insight
An Overview of the Global Securitized Markets
May 02, 2017
Global securitized markets in our opinion present a unique investment opportunity, as they offer attractive carry, relatively low rate sensitivity and historically low correlation to other assets.
Global Fixed Income Bulletin
Time to Be More Selective
Nov 06, 2017
The Global Fixed Income team discusses how it may be time to be more selective in the fixed income markets and how security selection will be important.
Global Fixed Income Bulletin
Bad Politics, Good Economies
Sep 14, 2017
The team discusses how with fundamentals and monetary policy stable, political noise has become the main source of market volatility.
 
 
 
 

 

RISK CONSIDERATIONS  

Diversification does not protect you against a loss in a particular market; however it allows you to spread that risk across various asset classes.

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In the current rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. Longer-term securities may be more sensitive to interest rate changes. In a declining interest-rate environment, the portfolio may generate less income. Investments in each class of Stripped Mortgage-Backed Securities (SMBS) are extremely sensitive to changes in interest rates. Interest Onlys tend to decrease in value substantially if interest rates decline and prepayment rates become more rapid. Principal Onlys tend to decrease in value substantially if interest rates increase and the rate of prepayment decreases. Some U.S. Government securities are not backed by the full faith and credit of the U.S., thus these issuers may not be able to meet their future payment obligations. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Collateralized mortgage obligations (CMOs) can have unpredictable cash flows that can increase the risk of loss. Investments in securities rated below investment grade (commonly known as "junk bonds") present greater risk of loss to principal and interest than investment in higher-quality securities. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Inverse floaters are sensitive to early prepayment risk and interest rate changes and are more volatile than most other fixed-income securities. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. Commercial Mortgage-Backed Securities (CMBS) are subject to credit risk and prepayment risk. Although prepayment risk is present, it is of a lesser degree in CMBS than in the residential mortgage market; commercial real estate property loans often contain provisions which substantially reduce the likelihood that such securities will be prepaid.

 

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be suitable for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

DEFINITIONS

Tracking error is the standard deviation of the difference between the portfolio and the benchmark returns. 

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates.

OTHER CONSIDERATIONS

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index (formerly listed as Barclays Mortgage Index) tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). This Index is the Mortgage Backed Securities Fixed Rate component of the Bloomberg Barclays U.S. Aggregate Index.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

The weights, tracking error typical yield duration, and the number of issuers represent represent typical ranges and are not a maximum number. The portfolio may exceed these from time to time due to market conditions and outstanding trades.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

 

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Not FDIC Insured—Offer No Bank Guarantee—May Lose Value
Not Insured By Any Federal Government Agency—Not A Deposit

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