A mortgage-backed and other securitized asset exchange traded fund strategy can complement traditional fixed income allocations.
In the recent webcast, Securitized Assets for Income and Diversification, Manulife Investment Management’s client portfolio manager Lee Giunta explained that securitization is the process of creating securities by pooling together various cash flow-producing financial assets. These securities are then sold to investors. The terms “asset-backed security” and “mortgage-backed security” are reflective of the underlying assets in the security. Any asset may be securitized as long as it is cash flow-producing, including residential and commercial mortgages, automobile loans, student loans, credit card financing, equipment loans and leases, business trade receivables, and the issuance of asset-backed commercial paper, among others.
Giunta argued that securitized markets are large and segmented, providing exploitable inefficiencies that investors can capitalize on. The securitized market offers potentially attractive relative value characteristics as it features risk-efficient, senior-enhanced securities, and the lack of transparency can cause securities to price below intrinsic value. Additionally, some types of securitized assets react positively to rising rates.
As a way to access this market, investors can look to the John Hancock Mortgage-Backed Securities ETF (JHMB), which is sub-advised by Manulife Investment Management (US) LLC, a John Hancock Investment Management-affiliated asset manager.
The strategy is backed by an experienced collaboration combining the U.S. core and core plus fixed income team with the expertise of the securitized assets team and grounded in the deep research capabilities of Manulife. The investment team is exclusively responsible for all investment decisions related to the strategy. Security selection and sector allocation are primary drivers of relative performance. The strategy is focused on income generation through mortgage-backed securities and complementary securitized exposure. Furthermore, extensive modeling capabilities and resources are used for stress testing and scenario analysis. The team focuses on volatility management through a diversified portfolio that is balanced between high quality agency mortgage-backed securities and other securitized fixed income.
“We believe securitized assets offer interesting sourcing opportunities due to information barriers and limited competition in a large, inefficient marketplace. The portfolio is managed with a value orientation and a focus on diversification among securitized asset classes, income generation as a consistent component of total return, and maximizing risk efficiency,” portfolio manager of securitized assets David A. Bees said.
The John Hancock Mortgage-Backed Securities ETF is actively managed and seeks a high level of current income while seeking to outperform the benchmark over a market cycle. Under normal market conditions, the fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in mortgage-backed securities. The fund may invest in mortgage-related securities issued or guaranteed by U.S. governmental entities and privately issued mortgage-related securities. These may include residential mortgage-backed securities, commercial mortgage-backed securities, and to-be-announced mortgage contracts, and may be rated investment-grade or below.
Chad Bucur, ETF specialist at John Hancock Investment Management, argued that investors should consider incorporating exposure to securitized assets as many traditional fixed income portfolios that have relied on the Bloomberg U.S. Aggregate Bond Index are now overexposed to low-yielding U.S. Treasuries and corporate bonds with a longer duration. Consequently, most fixed income investors face increased risks with lower yields to reward them.
Bucur said that securitized assets like mortgage-backed securities can help better diversify a fixed income portfolio. For example, mortgage-backed securities have outperformed during periods of rising rates and during periods of equity market drawdowns in the past. JHMB also offers a compelling tradeoff between yield and interest rate risk.
Financial advisors who are interested in learning more about securitized assets can watch the webcast here on demand.