An exchange-traded fund strategy backed by mortgages and other securitized assets can complement traditional fixed-income allocations.
In the recent webcast, Securitized assets for income and diversification, Lee Giunta, client portfolio manager for Manulife Investment Management, explained that securitization is the process of creating securities by pooling together various financial assets that generate cash flows. These securities are then sold to investors. The terms “asset-backed security” and “mortgage-backed security” reflect the underlying assets of the security. Any asset can be securitized as long as it generates cash flow, including residential and commercial mortgages, auto loans, student loans, credit card financing, equipment loans and rentals, trade receivables. and the issuance of asset-backed commercial paper, among others.
Giunta argued that securitized markets are large and segmented, offering workable inefficiencies that investors can capitalize on. The securitized market offers potentially attractive relative value characteristics because it presents high risk and senior securities, and the lack of transparency can cause the securities to be priced below their intrinsic value. In addition, certain types of securitized assets react positively to rising rates.
To access this market, investors can turn to John Hancock Mortgage Backed Securities ETF (JHMB), which is sub-advised by Manulife Investment Management (US) LLC, an asset manager affiliated with John Hancock Investment Management.
The strategy is based on an experienced collaboration combining the US core and core plus fixed income teams with the expertise of the Securitized Assets team and grounded in Manulife’s in-depth research capabilities. The investment team is exclusively responsible for all investment decisions related to the strategy. Stock selection and sector allocation are the main drivers of relative performance. The strategy is focused on generating income through mortgage-backed securities and additional securitized exposure. Additionally, extensive modeling capabilities and resources are used for stress testing and scenario analysis. The team focuses on managing volatility through a diversified portfolio that is balanced between high quality agency mortgage backed securities and other securitized fixed income securities.
“We believe that securitized assets offer attractive sourcing opportunities due to information barriers and limited competition in a large and inefficient market. The portfolio is managed with a value orientation and an emphasis on diversification among securitized asset classes, income generation as a consistent component of total return and maximization of risk efficiency, ”said the manager of portfolio of securitized assets, David A. Bees.
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 borrowing for investment purposes) in mortgage backed securities. The fund may invest in mortgage related securities issued or guaranteed by US government entities and mortgage related securities issued by the private sector. These may include residential mortgage-backed securities, commercial mortgage-backed securities and advertised mortgages, and may be rated investment grade or less.
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 US Aggregate Index Bond are now overexposed to low yielding US Treasuries and corporate bonds with longer duration. Therefore, most bond investors face increased risk with lower returns to reward them.
Bucur said 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 declining stock markets in the past. JHMB also offers a compelling trade-off between return and interest rate risk.
Financial advisors who wish to learn more about securitized assets can watch the webcast here on request.