MS INVF Global Asset Backed Securities Fund: Global Coronavirus Update

March 12, 2020

The U.S. Securitized Team is diligently monitoring the Coronavirus and any implications that it may have on securitized assets and is actively managing our portfolios as the story continues to develop.

Over the past year, we had been reducing risk and increasing the credit quality and liquidity of the portfolio by increasing our agency mortgage-backed securities (MBS) positioning and increasing our overall AAA-rated positioning. The average credit quality of the portfolio migrated higher, from a rating of A- at the beginning of 2019 to A+ in early 2020, as a result of this re-positioning. We believed that credit risk was not being properly priced with sufficient risk premiums, and that the credit yield curve was essentially too flat. However, these dynamics have significantly changed in the past few weeks as a result of coronavirus concerns, as credit risk and liquidity are being substantially re-priced.

We are now slowly and cautiously adding back risk to the portfolio, while keeping a watchful eye on liquidity.

We are concentrating our 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). Low mortgage rates, and the essential need for housing should keep these sectors well supported.
We are avoiding adding more troubled sectors such as Aircraft asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) collateralized by hotels or retail shopping centers which should be more substantially impacted by the coronavirus fears.
We have also reduced the Fund’s duration positioning from nearly 3 years at the start of 2020 to 1.5 years currently, as we believe it is more likely for rates to move higher from current levels than to move lower.

Although the additional geopolitical and economic turbulence could increase, we believe the MS INVF Global Asset Backed Securitized Fund is well positioned to weather this volatility. With a relatively low interest rate, and spread duration, the Fund continues to generate returns primarily from the cashflow carry of the underlying bonds; and as a result, has experienced lower volatility than many other fixed income sectors during periods of large interest rate moves and credit shocks.

We are active investors with the objective to generate income and long term growth of the Fund. Our investment approach does not aim to generate returns on market-to-market gains nor to capitalize duration positioning, but rather focuses on the robust fundamentals of the Fund’s underlying securities as we continue to search for attractive risk-adjusted reward opportunities in uncertain markets.

RISK WARNING

The value of bonds are likely to decrease if interest rates rise and vice versa. The value of financial derivative instruments are highly sensitive and may result in losses in excess of the amount invested by the Sub-Fund. Issuers may not be able to repay their debts, if this happens the value of your investment will decrease. This risk is higher where the fund invests in a bond with a lower credit rating. The fund relies on other parties to fulfil certain services, investments or transactions. If these parties become insolvent, it may expose the fund to financial loss. There may be an insufficient number of buyers or sellers which may affect the funds ability to buy or sell securities. Investment in Fixed Income Securities via the China Interbank Bond Market may also entail additional risks, such as counterparty and liquidity risk. There are increased risks of investing in emerging markets as political, legal and operational systems may be less developed than in developed markets. Past performance is not a reliable indicator of future results. Returns may increase or decrease as a result of currency fluctuations. The value of investments and the income from them can go down as well as up and investors may lose all or a substantial portion of his or her investment. The value of the investments and the income from them will vary and there can be no assurance that the Fund will achieve its investment objectives. Investments may be in a variety of currencies and therefore changes in rates of exchange between currencies may cause the value of investments to decrease or increase. Furthermore, the value of investments may be adversely affected by fluctuations in exchange rates between the investor’s reference currency and the base currency of the investments.

Global Fixed Income Team

The Global Fixed Income team follows a seamless process with a global outlook. They seek to identify and capture the potential value in situations where the market's implied forecasts are extreme.

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