The investors at West Conshohocken, Pa.-based PMG Advisors, a fixed-income investment advisory firm, insist that their MBS interests are as atypical as the name of their hometown.
Unlike the majority of MBS buysiders, portfolio managers at PMG stress that they look at mortgages in a slightly different way, viewing them as a true substitute for corporate paper.
"We probably look at mortgages much differently than your typical MBS player," said Rick Zackroff, head portfolio manager for MBS. "First of all, we are not involved in the mortgage market day to day. We're not interested so much in generic mortgages. The time we had the biggest exposure to generic mortgages was back in 1994 when the mortgage market blew up and we thought there was an opportunity there. But since then, our interest in generic mortgages has been quite limited."
Instead, PMG currently maintains a relatively small position in MBS - currently 7.5% of its $600 million portfolio consists of very high coupon, very seasoned 15-year mortgages.
"These high coupon 15-year mortgages are a great substitute for short corporates," Zackroff said. "They are extremely seasoned and have fairly dependable prepayment rates."
PMG's current preference for these bonds is directly linked to the firm's need for a seasoned product with a steadfast, dependable average life.
"With all the uncertainty in prepayments over the last year or so," Zackroff said, "our [mortgages] have performed within 10% to 20% of what we anticipated, even though many of the other mortgages were much, much faster."
Zackroff suggests that this is where the beauty of seasoned bonds comes into play: Because of the nature of the underlying loans, even if the prepayment speed increases, it has very little effect on the average life.
"With our mortgages, you usually have around a two-year average life," Zackroff said. "For example, whether it is a CPR of 22 or 25, the change in the average life is like 5/100 of a year. It is that seasoned. So therefore it provides very dependable cashflows."
Not surprisingly, the company has made it a point to steer clear of structured products such as CMOs as prepayment speeds become more and more unpredictable.
"We looked at structured products in the early 90s," Zackroff said. "At that point in time we discovered, as with other things in life, you only get what you pay for. So there was not a tremendous yield advantage in buying a well-structured PAC, versus buying a non-callable corporate, at least in our opinion."
Looking Ahead
Overall, Zackroff said the firm's investment strategy and philosophy hasn't changed much over the last several years, though its choice of product has certainly evolved.
"In the past, we've owned things like Fannie Mae GL's," Zackroff noted. "These government loans were also very seasoned, and similar to the paper that we invest in now."
Although PMG is not ready to return to its Fannie Mae GL roots just yet, its unique way of viewing mortgage investments is not likely to change in the near future.
Looking ahead, Zackroff says that PMG is currently "positively convexed," and its upcoming investments really depends on the market.
"We're very convexed versus our benchmark," he said. "Therefore, we do think that this is an opportunity, and if at some point in time rates go low, we will take on some negative convexity." - AT
