U.S. MBS Funds Emerge Battered, With Most Returns Negative
Mutual funds that invest primarily in government-related debt securities backed by one-to-four family loans are starting off 2014 with a year of negative cumulative total returns behind them.
Funds that invest mostly in Ginnie Mae mortgage-backed securities in 2013 had an average “return” of almost -3%. Funds that invest primarily in Fannie Mae and Freddie Mac MBS the average “return” was roughly -1%, according to Lipper/Reuters.
The top eight Ginnie Mae funds and top five “U.S. Mortgage” funds managed slight gains in the last quarter of the year, but even these were far less than 1%. Average returns over this period also were negative, although by less than -1%. The previous quarter MBS fund returns averaged less than 1%.
Returns suffered primarily due to market concerns that emerged last year about the possibility that the Federal Reserve would reverse its large purchases of government-related bonds, ending a long run of lower interest rates.
The Fed plans to roll back its bond purchases in 2014 if the economy stays strong. Employment numbers the Fed watches to that end are improving but remain shy of its target.
Even with returns battered in 2013, MBS fund returns are much better if you go back over an investment horizon starting five years ago when the mortgage market was near cyclical lows. They average more than 22% for Ginnie Mae funds and over 28% for Fannie Mae and Freddie Mac funds.
Ginnie and agency MBS will always hold significant attraction as investments so long as the government guarantees payments to investors, but investors who want more return in the short term are a different story. The Fed’s huge presence in the market also has been a deterrent and its rollback will take time.
The Fed has been “just crowding everybody out,” Deutsche Bank chief economist Joseph LaVorgna said at a press briefing last week.
Another concern for some is that the single-family MBS market in general remains dominated by government-related entities. While there are clear efforts to establish more of a nonagency market these are still limited, notes Michael Lillard, managing director/chief investment officer at Prudential fixed income management.
Proceeds managed in the MBS market during the past year show volumes have increased to roughly $419 billion in 2013 from about $399 billion in 2012, Thomson Reuters data show.
More opportunities lies in the multifamily and commercial mortgage-backed securities market rather than the single-family MBS sector, researchers say.
Fannie and Freddie’s involvement in multifamily has faced some uncertainty as the leadership of their regulator has changed hands, but there has been a “steady entry of other capital sources,” said Michael McRoberts, managing director, Prudential Mortgage Capital Co.
“We’re real optimistic on CMBS spreads,” said Lillard at Prudential’s Jan. 7 global economic and retirement outlook conference.
“We like commercial over residential,” said Randy Brown, co-chief investment official of Deutsche Asset & Wealth management. There has been overbuilding in the residential sector and commercial market supply-demand factors are more favorable, he says.
The shift in the market in 2013 has left investors favoring equities over bonds in many cases this year based on returns.
Real estate options here include commercial equity real estate investment trusts which have been producing returns below some other alternatives in the market but certain above those of RMBS.
REIT stocks are in a “very good position” when combined with other real estate investment strategies, says Marc Halle, managing director for Prudential Real Estate Investors, who suggest them in combination with private real estate investment.
He singles out as investment opportunities he likes class A regional malls and multifamily.
Malls have been “unduly punished by fear of the Internet driving sales,” but higher-quality properties are still needed as retail is still dependent on a mix of store and Internet sales, Halle says.
“Tenants need both,” he says, noting that good malls and their anchors continue to successfully evolve with the times and today are needed as a “showroom” for consumers.