Real Estate
Mortgage Trusts (REITS) are familiar to most investors and, as we know, they
come in various types. Office property
and residential mortgage REITS are two of the largest sectors. The first invests typically in hard illiquid
assets while the latter invests in raw mortgages or mortgage-backed
securities. From physical properties to
raw loans to mortgage-backed securities, investors in REITS can choose from a
wide spectrum of real estate-related assets representing a similar wide
spectrum of liquidity, from low to high.
One of the “magical” properties of REIT investing is that investors
seemingly are able to convert low-to-moderately liquid assets into highly
liquid securities by investing in the equity of a REIT.
But this magic
is not without a high cost; the equity market can extract a high cost for this
liquidity. The high-grade MBS market of
2013 is a very good example. Annaly
Capital Management (NLY) and American Capital Agency Corp. (AGNC) are a couple
of cases in point. Both of these REITS
invest predominately in high grade agency MBS and were down approximate 30% in
price in 2013. This was due in some
degree to spread widening in the underlying agency mortgages (due primarily to anticipation
of Fed “Tapering” its bond buying program).
But agency MBS did not fall anywhere near 30% in price in 2013! Even correcting for leverage, it is clear
that a large part of the fall in price for these agency mortgage REITS was due
to the equity markets raising the equity risk premium in this sector. Equity volatility can add significant
downside to a simple investment into high grade and highly liquid residential MBS!
Investors have
another option to choose from. An MBS relative
value trading strategy that invests in highly liquid agency mortgages can still
provide extremely strong liquidity, carry and hedged, non-directional
returns. The ability to generate alpha
from a liquid, active trading strategy, as opposed to a static, beta-driven
investment also comes with much greater transparency to the underlying holdings
and most importantly…without equity market volatility. Please contact Tradex to learn more about
this investment strategy.
Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com
203-863-1500
@Tradex_Global
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