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MS INVF Global Asset Backed Securities Fund: Global Coronavirus Update (March 20)
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Market Pulse
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März 22, 2020
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MS INVF Global Asset Backed Securities Fund: Global Coronavirus Update (March 20)
MS INVF Global Asset Backed Securities Fund: Global Coronavirus Update (March 20)
MS INVF Global Asset Backed Securities Fund: Global Coronavirus Update (March 20) |
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During this turbulent time the Global Securitized Team has made it a priority to keep investors as informed as possible with timely updates as the impacts of the coronavirus continue to unfold. The team continues to meticulously monitor the situation and the effects on securitized assets and is actively managing our portfolios as the story continues to develop.
The coronavirus has clearly roiled all markets in March, and the securitized markets, although having experienced these negative effects to a lesser extent than most fixed income sectors, are no exception. Spreads are widening significantly across all securitized credit asset classes, almost regardless of fundamental value. Even agency mortgage-backed securities (MBS) has underperformed this year as lower mortgage rates have increased prepayment concerns. The asset classes most directly impacted by the coronavirus have suffered the most, with aircraft asset-backed securities (ABS), hotel commercial mortgage-backed securities (CMBS), and shopping centre and retail-related CMBS among the worst performing asset classes; however, all securitized assets, excluding agency MBS, have felt the effects of increased pressure on liquidity, but to a lesser extent.
As mentioned in last week’s update, over the past year, we had been reducing risk and increasing the credit quality and liquidity of the portfolio by increasing our agency MBS, and AAA-rated positions. This was in response to the belief that credit risk was not being properly priced with sufficient risk premiums, and that the credit yield curve was essentially too flat. However, a monumental shift in these dynamics has occurred over the past few weeks as a result of coronavirus concerns, which has led to substantial repricing of credit risk and liquidity in the securitized sector.
As a result of this recalibration, we are finding many cheap opportunities across all securitized sectors, and have begun to slowly and cautiously look to add back risk to the portfolio in a highly selective manner, while keeping a watchful eye on liquidity; specifically, by selecting securities which we believe offer attractive risk adjusted returns in the current environment, in sectors which we believe to be the most resilient to any existing, or potential future effects of the coronavirus. Additionally the massive purchase program announced earlier this week by the European Central Bank (ECB) should act as a significant tailwind for European ABS and RMBS, and should be a significantly positive event for the portfolio given the Fund’s sizable position in European RMBS and ABS.
A few summarizing points on the Fund’s positioning and outlook:
- The team is slowly and cautiously adding back risk to the portfolio, while keeping a watchful eye on liquidity.
- The team is concentrating risk additions on sectors that we believe to be more resilient to the impacts of coronavirus, namely US and European residential mortgage-back securities (RMBS), as low mortgage rates, and the essential need for housing should keep these sectors well supported.
- This new ECB purchase program should be a significantly positive event for European securitized assets and for the Fund its sizable allocation to European RMBS and ABS
- The team is avoiding adding more troubled sectors such as Aircraft asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) collateralised by hotels and retail shopping centres which should be more substantially impacted by the coronavirus fears.
- The Fund has reduced its interest rate duration positioning this year as we believe it is more likely for rates to move higher from current levels than to move lower.
The MS INVF Global Asset Backed Securities Fund continues to maintain a relatively short interest duration and spread duration position, which has helped the Fund perform better than many comparable funds and other fixed income asset classes during this period of high volatility. The Fund’s investment approach is to generate returns from the cashflow carry of the securities, rather than mark-to-market moves, and therefore the Fund has held up better and should be more resilient to market moves. We believe the fundamental cashflow performance of the Fund’s securities to fare relatively well, despite coronavirus impacts, given the significant levels of structural credit protection in these securities resulting from the stress test of the financial crisis, and the robust fundamentals of the Fund’s underlying securities.
With assets having cheapened meaningfully, we believe the fund is positioned to perform well going forward and that it offers better fundamental credit risk than many other fixed income sectors. The Morgan Stanley Global Securitized team takes a very active approach to investing and we will continue to navigate this turbulent market with the primary goal being to deliver the best risk adjusted returns our investors.