In the third and final in our series of EOY interviews with investment managers about where they expect to see value in 2022, SCI caught up with Atlanta-based Angel Oak Capital Advisors.

Colin McBurnette handles RMBS allocation for Angel Oak, and in 2021 he expanded the footprint of his portfolio into the mortgage insurance-linked note market for the first time.

Heading into March 2020, Angel Oak had zero dollars in total MI exposure in its flagship Angel Oak Multi Strategy Income Fund (ANGIX), but this year it climbed to a peak of $400m. The fund will continue to focus on the sector in 2022, he predicts.

“It’s an HPA play for us, and it’s a portion of the market which has an expanding buyer base. We love the floating rate nature, and the built-in finite extension due to the amortization of the underlying mortgages,” he explains.

It is also a portion of the structured finance market which is under-valued, he says, due to the relative complexity and opacity of the product. He doesn’t believe it is in fact a CRT product as it’s a more complicated instrument than CAS or STACR.

But these differences allow MILNs to trade wide of the equivalent coverage points in CAS or STACR notes despite the considerable crossover in the underlying collateral.

“CAS and STACR are huge programmes, they’re unique programmes and Fannie and Freddie offer certain incentives. There are a lot of dynamics that make CAS and STACR trade the way they do that do not exist in the MI market. It’s still under-valued and we have increased our holding lately,” he says.

The three main issuers Angel Oak has concentrated upon are Arch, Essent and Radian. Essent and Radian both issued MILNs in November. The former sold a $435m note, dubbed Radnor Re 2021-2, while Radian sold a $484 note called Eagle Re 2021-2.

To give an idea of yields, the Eagle Re 2021-2 M1-B tranche, rated BBB/Baa3, was priced to return SOFR plus 205bp.

As of 30 September 2021, Angel Oak has $13.3bn assets under management, of which $6.9bn was invested in the ANGIX. Some 62% of the overall total is devoted to RMBS, 10% to ABS, 6% to CLOs, 6% to corporates, 3% to CMBS and the remainder to government bonds and agency notes.

While most onlookers predict a drop off in RMBS issuance in 2022, McBurnette is a dissenter. He thinks 2022 issuance will broadly match 2021 with something like $200bn of new supply hitting the market. Agency origination continues to be profitable he notes, while refinancing will retain its popularity.

He saw considerable value further down the capital structure over the last year as REITs and hedge funds were forced to exit the sector as repo market liquidity dried up, pushing spreads wider.

“For unleveraged players like ourselves spreads got to the point where they were interesting to us, particularly given our low default view. The bottom of the capital structure suddenly looked cheap, when it hadn’t been during the bulk of the new issue wave,” he says.

Volatility is likely to make a return to the market in 2022, however, particularly in light of inflationary pressures. Moreover, the market is still basking in the sunlight of Federal Reserve stimulus measures and will continue to do so.

“Despite the sabre rattling from the Fed, it’s still incredibly accommodative. The tapering discussion does not involve stopping the investment of paydowns of existing holdings. According to JP Morgan data, that will equal 50% of the entire agency gross supply next year. There is a profound amount of accommodation still there,” he says.

In view of these pressures, he wants to stay invested in the short end and believes the curve will steepen. He doesn’t want to take on too much interest rate risk at the moment, and favours short term high quality structured credit like the RMBS sector.

Of course, not all volatility is bad. Triple A yields have recently backed up to over plus 100bp again, allowing investors to go back up the credit curve without sacrificing yield - the opposite position to the one allowed by the absence of REITs and fast money in the lower areas of the capital structure in 2021.

“It’s the reverse of much of 2021. You can shift to the top of the capital structure and still make money. Option values have collapsed and we can see positive returns here in 2022. Volatility within reason is your friend. If it’s like 2020 then you don’t sleep,” he says.

Simon Boughey