Clayton Triick, Senior Portfolio Manager of Angel Oak Capital, Shares His Insights on the Structured Credit Space
Ajay Singh Jun 13, 2019
MutualFunds.com: Please tell us about Angel Oak Capital Advisors.
Clayton Triick (CT): Angel Oak Capital Advisors is an investment management firm located in Atlanta, Georgia with just over $10 billion in assets under management. We currently offer four other mutual funds alongside our UltraShort Income Fund (AOUIX). Our firm specializes in mortgage-backed securities, and we offer a range of mutual funds that focus on the fixed-income space – specifically structured credit. We strive to provide our investors with compelling risk-adjusted returns through price appreciation and stable current income. We take a value-driven approach when seeking out fixed-income opportunities.
Mutual Fund Based on Structured Credit Products
CT: Quick highlights on the Fund: short duration, cash+ alternative (open-ended fund); current distribution yield of approximately 3.25% for the I-share.
Within the U.S. structured credit markets, the Fund’s strategy is to target the best relative value to maximize risk-adjusted returns over a full credit cycle. The investment objective of the Angel Oak UltraShort Income Fund is to provide current income while seeking to minimize price volatility and maintain liquidity.
The key differences of this strategy compared with the flagship fund at Angel Oak – the Angel Oak Multi-Strategy Income Fund (ANGIX) – are the duration and average life constraints. AOUIX’s effective duration cannot exceed one year and the average life of the assets cannot exceed two years on average. This maturity differential creates a very distinct asset allocation mix and leads to a combination of new issue RMBS, ABS and CMBS. This sector allocation provides a compelling opportunity in the current market for price stability, but at an elevated yield profile.
Interestingly, before launching the strategy in 2018, we realized there were very few specific offerings that focused primarily on structured credit for short-duration mutual fund investors. The addition of our ultrashort strategy has filled this void in the fund marketplace.
The primary focus of the fund is within the best relative value opportunities of structured credit, including RMBS, CMBS, ABS and CLOs. The Fund may also include allocations to government bonds and agency-backed securities, which include U.S. Treasury securities, agency RMBS and agency CMBS. We believe this combination of structured credit, U.S. Treasuries and agency-backed bonds will provide balance to the Fund and enhance price stability. This top-down approach to asset allocation will seek to provide the fund with superior income within the ultrashort landscape, with a predominant focus on minimizing volatility.
Click here to check the total returns of the fund.
MutualFunds.com: What role can the fund play in an investor’s fixed-income portfolio?
CT: Ultrashort duration funds may offer various benefits to a broader fixed-income portfolio. In the current environment, the U.S. yield curve is inverted. Investors can find attractive income at the front end of the yield curve over and above intermediate-duration assets. Additionally, the introduction of high-quality structured credit tends to dampen price volatility during times of stress for short-duration portfolios. This unique attribute with respect to market risk can be beneficial to an investor’s entire portfolio.
One key reason driving lower expected volatility is the many areas of structured credit having “de-levering” structures; i.e., as they approach maturity, their credit risk is at their lowest point as credit protection is at their maximum point for a particular tranche. This is in direct contrast to corporate credit, which tends to carry more of a binary credit risk, as their roll risk increases as the time to maturity decreases.
This relative performance diversion was most evident between the Angel Oak UltraShort Income Fund and its peer group in Q4 2018, as NAV volatility was minimal compared with corporate credit-focused ultrashort duration funds. The Angel Oak UltraShort Income Fund seeks to provide elevated income with less expected price volatility than the peer group.
Click here to learn more about the different aspects of portfolio rebalancing.
Trends Shaping the Structured Credit Space
CT: The Great Recession has created many aftereffects that are still relevant to the U.S. investor today. In our view, one of the most glaring changes since the pre-crisis era has been the improvement in credit quality within structured credit, which has been driven by recency bias as investors remain more cautious within U.S. structured products compared to corporate credit. This has resulted in structured credit trading at a discount to corporate credit on a risk-adjusted perspective. Within the short duration space, we believe this to be no different. The combination of more conservative assumptions from rating agencies, the hesitancy from fixed-income investors and the return of integrity to the origination process have all favored structured credit investors. This improvement within underwriting standards has been most pronounced within new-issue RMBS and gives short-duration, credit-focused investors an attractive area in which to invest.
Regarding expected resiliency and the significant changes since the financial crisis, many sectors that issue RMBS provide higher-quality characteristics than in years past. In new-issue RMBS, the fund invests across the capital structure to take advantage of credit enhancement levels that are reflective of much more draconian scenarios for housing and mortgage credit than we see occurring in the next downturn. For example, BBB-rated tranches in non-QM securitizations today often exhibit similar-to-higher credit enhancement levels than AAA bonds issued during the pre-crisis period. Even in a severe economic downturn, we see a number of below-investment-grade tranches still recovering par.
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