Clayton Triick, CFA, senior portfolio manager at Angel Oak Capital Advisors, answers SCI's questions

Q: How and when did you become involved in the securitisation market?
A: Angel Oak Capital Advisors has a long history within the US securitised markets. Originally as a distressed credit investor during the global financial crisis, Angel Oak was able to invest capital targeting deeply discounted private-label RMBS.

As markets continued to improve over the subsequent decade, we were able to bring the talented portfolio management team to the mutual fund world by creating a series of open-end funds targeting primarily US securitised assets. These funds fill a specific void in the mutual fund marketplace by investing within institutionalised assets and helping investors earn attractive income with a modest correlation to traditional fixed-income markets.

Alongside the build-out of the mutual fund strategies, Angel Oak invested in the re-emergence of the private-label RMBS asset class, specifically sectors within non-QM and post-crisis mortgage credit. Various sectors of mortgage credit look very different than they did during the pre-financial crisis era and Angel Oak helped drive the standardisation of new-issue mortgage credit. The firm is one of the top originators of non-QM loans and established a best-in-class mortgage trust series, Angel Oak Mortgage Trust.

Q: What are the firm’s key areas of focus today?
A: There are significant opportunities still available within US securitised markets. In short-duration markets, a combination of RMBS, ABS, CLOs and agency-backed bonds provide elevated income and limited volatility in 2021.

Spreads are still attractive, as many markets have not fully recovered from the Covid-19 shock. Investors are in need of yield in this low interest-rate world, particularly in areas with less duration risk.

Total cash within money market funds is still above the global financial crisis peak, creating a largely unmet need for short-duration income north of money market yields. In our view, traditional short-duration markets are not offering enough yield per unit of risk. Within securitised markets, we have positioned portfolios to produce a higher level of income while there is still limited expected market volatility.

Q: How does the firm differentiate itself from its competitors?
A: The asset management team is a diverse and deeply experienced group that integrates multiple areas of structured-credit security analysis, including origination, securitisation, servicing, secondary market trading and portfolio management. Risk management practices are strongly embedded in the firm’s processes, which drive long-term performance by maintaining consistency in fundamental analysis and best execution.

Angel Oak Capital Advisors manages various fixed-income funds, including private hedge funds and public mutual funds. Angel Oak Capital Advisors’ independence, mortgage expertise and market intelligence create a significant differentiation within the asset management industry.

The team’s deep experience in evaluating the multiple levels of risk inherent within structured credit is a result of cumulatively managing more than US$25bn of similar RMBS, CMBS, CLOs and ABS at prior firms. This level of structured-credit expertise at a fee-based asset management company is very unique in the industry. The degree of detailed analysis conducted by portfolio managers enables the firm to achieve attractive risk-adjusted total returns.

Our team has significant experience and expertise in origination, sourcing, structuring and underwriting within fixed income generally and structured credit, in particular. Our team has been in the market consistently since the mid-1990s, developing deep industry relationships spanning many counterparties and market participants. These relationships facilitate security sourcing and best execution to enable alpha creation.

Q: What is your strategy going forward?
A: The investment team continues to believe the mortgage and consumer credit markets remain very attractive. Limited supply within US residential housing, alongside significant fiscal stimulus for US consumers, continues to bolster the positive credit fundamental views within these markets.

Income should be king in 2021 and beyond. For income-focused investors, we overwhelmingly favour short-duration opportunities in US structured credit backed by residential mortgage and consumer collateral, select high-yield issuers, select CLO tranches and financials rather than longer-duration areas of fixed income.

We remain cautious about non-agency CMBS due to structural changes to the commercial real estate market as a result of Covid-19. We remain focused on higher-quality subsectors within CMBS and are avoiding risk down in the capital structure.

Not only will income be a critical component of total return in the coming year, but less interest-rate sensitivity at the long end of the curve will also be a differentiating factor, considering the brisk growth ahead.

Q: Which challenges/opportunities do you anticipate in the future?
A: Looking forward, many uncertainties continue to surround Covid-19. Will the vaccines be as effective in a massive, nationwide inoculation campaign as they have been in clinical trials? Will a new strain of the virus make current vaccines irrelevant? Questions like these could be subject to debate for years within the health care and economic arenas.

What we do know is that fiscal and monetary policy is here to support the US economy. So far, the data has been quite strong related to vaccine effectiveness, while fiscal policymakers have created so much stimulus that consumer spending and savings rose above pre-Covid levels. The support from both Congress and the Fed cannot be understated.

This policy support has provided a powerful tailwind to the reopening of the US economy and the consumer is in excellent shape. Credit markets within housing and the consumer performed well throughout the pandemic and have truly shined as the markets recover. Home prices rose by approximately 10% in 2020, a stark contrast to the circa 40% drop following the Great Recession of 2008.

As we position our portfolios within value-driven securitised credit for the future, we see many markets are still recovering from the Covid-19 macroeconomic shock. The short pause in capital markets activity in early 2020 initially created significant secondary market opportunities in US credit securities. As markets have begun to normalise in early 2021, we are looking across the global opportunity set to find high income over the next two to five years.

We see opportunities within both liquid and illiquid markets of securitised credit. In the liquid space, a targeted mix of housing and consumer credit within opportunistic allocations of discounted CLOs provide high income with upside price-return potential as the economy reopens.

Mark Pelham