In addition to these primary benefits, MBS offer other potential benefits as well. MBS are among the most liquid fixed income securities in the world, and are attractive risk-based capital assets under Basel 1 and 2.1
MBS also have been among the world’s most attractive opportunities for alpha in broader fixed income portfolios due to the fact that trading is usually dominated by accounting and regulatory-constrained investors. These constraints can create attractive opportunities for total return investors. Because of the many potential benefits MBS may offer, financial institutions continue to make substantial allocations to MBS.
In a market as deep and liquid as MBS, finding value requires a thorough understanding of the sector’s unique risk factors and opportunities. PIMCO analyzes MBS using proprietary models developed by our financial engineers and refined by our portfolio managers over many years. We believe the experience of our mortgage team and the level of sophistication of our proprietary analytic platform are critical factors in the successful management of MBS portfolios.
PIMCO’s goal in managing mortgage-backed securities is to generate consistent, long-term outperformance. In our efforts to achieve that goal, we employ a unique approach to the MBS market that emphasizes actively managed exposure to Agency pass-throughs, which we believe offer the greatest potential for risk-adjusted excess returns in a mortgage portfolio.
While we focus primarily on Agency pass-throughs, we also look for value and attractive risk-adjusted return opportunities in all segments of the larger MBS market. However, we believe the Agency pass-through market can offer the greatest potential for alpha due to its liquidity and credit quality. For Non-Agency MBS, Commercial MBS, and mortgage derivatives, we frequently demand more yield in compensation for the probability of principal loss and liquidity risk than the market typically provides. As a result, PIMCO’s dedicated mortgage portfolios will be primarily concentrated in Agency MBS holdings.
We believe Agency MBS can offer the best opportunity for excess return in a mortgage portfolio. Our goal in managing MBS portfolios is consistent, repeatable, high-quality alpha.
PIMCO does not rely on any single model in its investment process. Rather, we take a multi-faceted approach to MBS valuation, with three major components:
We believe using this multi-faceted approach is the most effective and robust method for evaluating the return potential of MBS and the risks they entail.
In the current environment of sharp home price decline where borrower home equity has been reduced, non-Agency mortgage securities carry historically high levels of default risk. PIMCO’s primary goal is to determine ultimate loss on a security or loan. We determine loss expectations by employing a proprietary loan level quantitative model in addition to an analysis of qualitative factors such as servicer practice and government housing policy impacts. The primary objective of this loan level analysis is to project the cumulative losses on a pool basis, as well as the prepayment and delinquency trajectories.
In addition to understanding the risks embedded in the pool of loans as well as the structure of the securities, PIMCO analyzes the macro effects of trends in the non-Agency MBS market. We monitor the effects of mortgage credit on national and regional home price appreciation, the availability of mortgage financing, origination trends affecting Agency MBS prepayments, and the balance sheet effects on holders of non-Agency MBS. Given the recent volatility of the sector and its far reaching impact outside of securitization markets, a robust mortgage credit research capability is key to understanding its linkages to other sectors as well as to the broader economy.
PIMCO’s term structure models are tailored for LIBOR and swap rates, which are most consistent with the mechanics of the MBS market and the risk/valuation of securities in the sector. Our prepayment model incorporates historical behavior, stressing recent prepayment speeds, and is also sensitive to home price levels, which are a key driver of housing turnover. In addition, we compare our internally created term structure and prepayment model against publicly available Wall Street models daily. This side-by-side analysis is extremely useful in identifying securities with high model risk and also helps us to understand the possible range of outcomes for a security or a portfolio.
We also employ proprietary analytics to evaluate individual MBS with respect to their underlying characteristics, such as: rate, type, servicer, loan balance, origination date, borrower quality, housing prices, and spread to traditional loans at origination.
Our substantial analytics capabilities provide portfolio managers with what we feel is the best possible platform for the complexities of MBS risk management.
The information on this web site is for residents of Europe only.
All material contained on the Exchange-Traded Funds section of this website is purely for informational purposes only and is not intended as investment advice. Investors should seek financial advice before making any investment decisions.
The products and services are available only to residents of those jurisdictions. The information on this web site does not constitute an offer for products or services, or a solicitation of an offer to any persons outside of Europe who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. Copyright ©2017 PIMCO Europe Limited. All rights reserved.
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