Caroline Chen, svp and research analyst at Income Research & Management, answers SCI's questions

Q: How and when did Income Research & Management become involved in the securitisation market?
A: Income Research & Management is a privately-owned fixed income investment manager that serves institutional and private clients. The firm is headquartered in Boston and was founded in 1987 by managing principals John Sommers and Jack Sommers. Originally a credit-oriented manager, IR+M has been involved in the securitised markets for over 20 years.

The firm has approximately US$77bn in assets under management, of which securitisation bonds account for US$12bn. The securitised market represents a stable business for us and most of the products we offer to our clients include a securitised allocation in some form.

Q: What are your key areas of focus today?
A: The product offerings we manage include Core, Core Plus and Short-duration Crossover funds. We’re also currently offering a Securitized-Only portfolio, which should provide stability in today’s volatile market.

IR+M invests in RMBS, CMBS and ABS, generally at the senior tranche level. Within ABS, we’ll selectively invest further down the capital structure, if we’re comfortable with the issuer. We undertake due diligence on each issuer 2-3 times a year and prefer public listed companies because there is lots of financial transparency, helping ensure they have skin in the game.

Within RMBS, we invest in both the agency and non-agency spaces. Our strategic positioning is in prime quality collateral, with FICO scores of over 700, a 20%-30% down payment and DTIs below 43%. Given current uncertainties and where we are in the credit cycle, these borrowers can be expected to perform better.

I also cover the single-family rental space. Over the years, SFR securitisation issuers have proved that they are not simply trading platforms from which to flip properties, but they have truly become landlords. SFR is a stable business model and is supported by demand, as there isn’t enough starter home stock available in the US.

Q: How does IR+M differentiate itself from its competitors?
A: ESG is an extremely important consideration for us: almost all new issues are analysed via our screening framework and it forms part of our due diligence on issuers. We don’t have a specific ESG fund, but the screening provides an insight into how well issuers run their businesses. For example, it highlights how secure their IT infrastructure and operations are, and the potential for data breaches.

ESG considerations can contribute to the bottom line. Take marketplace lending platforms, for example – several recent investigations have been red flags for us and we have offloaded our exposure before returns were hit. Most of the first-generation fintech ceos have moved on now.

Q: What is your strategy going forward?
A: We’ve seen tremendous volumes in whole business securitisations this year, with around US$8bn issued year-to-date and another US$500m deal marketing. Typically, the sector is dominated by restaurant names, but this year a number of other businesses – massage parlours and fitness centres, for instance – have tapped the market.

We like the asset class because of the wider spreads on offer at the triple-B rating level and they are good bonds for long-duration mandates, given their five- to 10-year maturities. But it’s important to be selective, as private equity firms are moving into the space, adding lots of debt to businesses and using securitisations as cash-outs to pay themselves dividends with.

Again, we focus on public companies with well-established brands and hundreds of franchisees. Ideally, we want to see securitisation being used as a capital management tool and funding channel, with staggered maturity profiles.

Q: Which challenges/opportunities do you anticipate in the future?
A: Supply is robust and there is a strong pipeline for the rest of the year, with issuers taking advantage of the low interest rates. However, as investors, it’s important to pay attention when issuance is abundant and stick to our core qualities and underwriting standards.

The securitisation market is at an interesting time: the US economy is relatively strong – especially on the consumer side – and the credit environment is benign, but we’re in the late stages of the cycle and 2020 is an election year. Moreover, there are significant uncertainties around the Hong Kong protests, the Chinese economic slowdown, Brexit and trade wars – which all may ultimately have ripple effects on the securitisation market. There are certainly headwinds to be aware of in terms of the macro environment.

Corinne Smith