Strategy Overview
A GNMA strategy offers investors efficient exposure to the mortgage-backed securities market, the largest sector of the global fixed income market, with a focus on U.S. government–guaranteed GNMA securities.
Potential benefits of a GNMA strategy:
- May offer yield premium relative to Treasuries, with high credit quality and liquidity
- Aims to provide excess returns through active management focused on total return
- Improved portfolio diversification
The strategy employs a unique approach to the mortgage-backed securities (MBS) market that emphasizes actively managed exposure to Agency-guaranteed MBS. The Agency mortgage market has been a critical source of excess return opportunity for PIMCO since its founding, and the firm has a dedicated team of career mortgage portfolio managers. The strategy has a disciplined focus on value and security selection, which is supported by a sophisticated analytical platform that helps identify mispriced securities presenting attractive investment opportunities.
| Applications for the GNMA strategy |
| Mortgage-backed securities serve a number of different functions within an investment portfolio. Because of their typical high credit quality, mortgages may be used to offset lower-quality credit exposure in a portfolio. Mortgages can also serve as a lower volatility addition to a portfolio of corporate bonds, as a core holding within a total return fixed income portfolio or as a higher-yielding alternative within a short duration portfolio albeit in exchange for accepting pre-payment risk. |
| Investment Philosophy and Sources of Added Value |
| Agency MBS have been tremendously liquid, frequently mispriced, and have exhibited robust mean reversion to fair value. PIMCO’s goal in managing mortgage-backed securities is to generate consistent, long-term outperformance. To achieve that goal, we employ a unique approach to the MBS market that emphasizes actively managed exposure to Agency pass-throughs, which we believe offer the greatest potential for risk-adjusted excess returns in a mortgage portfolio.
While we focus primarily on pass-throughs, we also look for value and attractive risk-adjusted return opportunities in all segments of the larger MBS market. However, we believe the Agency pass-through market offers the greatest potential for alpha due to its outstanding liquidity and credit quality. Therefore, we frequently demand more yield for esoteric mortgage securities – collateralized mortgage obligations, interest-only strips, principal-only strips, etc. – than the market provides because we believe these instruments typically subtract liquidity and add more risk to a portfolio than can be justified by their spreads.
We believe Agency MBS offer the best opportunity for excess return in a mortgage portfolio. Our goal in managing MBS portfolios is consistent, repeatable, high-quality alpha. |
| Risk Management/Controls |
| Active MBS portfolio management requires a significant investment in analytics and risk management infrastructure. PIMCO has always devoted substantial resources to our proprietary mortgage analytics platform and has developed a full set of specialized tools. Our analytic arsenal includes two term structure models (Brace, Gatarek, Musiela and Black, Derman, Toy) as well as our proprietary PIMCO mortgage prepayment model. PIMCO’s term structure models are tailored for LIBOR and swap rates, which are most consistent with the mechanics of the MBS market and the risk/valuation of securities in the sector. Our prepayment model incorporates historical behavior, stressing recent prepayment speeds, and is also sensitive to home price levels, which are a key driver of housing turnover. In addition, we compare our internally created term structure and prepayment model against publicly available Wall Street models daily. This side-by-side analysis is extremely useful in identifying securities with high model risk and also helps us to understand the possible range of outcomes for a security or a portfolio.
We also employ proprietary analytics to evaluate individual MBS with respect to their underlying characteristics, such as rate, type, servicer, loan balance, origination date, borrower quality, housing prices and spread to traditional loans at origination.
Our substantial analytics capabilities provide portfolio managers with the best possible platform for the complexities of MBS risk management. |