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Managers make hay with toxic mortgage funds

The performance of the funds showed that the government program was a success

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Andrew Rabinowitz said the good performance of the funds showed that the program was a ‘great success.’

Money managers registered strong returns as part of the U.S. government's Public-Private Investment Program that began after the global financial crisis, closing out gains in the mid-20% range over the roughly three-year period, according to a report from the Treasury Department.

In December, when Los Angeles-based Oaktree Capital Group LLC was the eighth and final manager to finish up investing, the firm posted a 26.3% internal rate of return on the $2.22 billion it ran, which ranked it first among the returns of all managers in the program.

“All the managers did incredibly well (in terms of performance), so I think the government's plan was a great success for both the Treasury and investors,” said Andrew Rabinowitz, a partner and the chief operating officer of participating manager Marathon Asset Management LP in New York.

All combined, the eight managers had more than $29.9 billion of purchasing power to invest in the public-private investment partnership through a mixture of money raised from institutional investors, matching government funds and low-interest government loans. Through the government program, the managers' mandate was to buy troubled mortgages on banks' balance sheets in order to ease the marketplace for mortgage-backed securities and to encourage banks to increase lending.

Oaktree's fund started in February 2010; all of the others started during the fourth quarter of 2009.

Following Oaktree's fund was the AG GECC PPIF Master Fund LP, a fund jointly run by Angelo Gordon & Co. and General Electric Capital Corp. which experienced a net IRR of 24.8% since inception. Marathon Legacy Securities Public-Private Investment Partnership LP earned 24.6%.

Marathon was followed by a partnership between Western Asset Management Co. and the RLJ Cos., at 24.1%; BlackRock (BLK) Inc. (BLK), at 23.1%; Wellington Management Co. LLP, at 20.1%; and AllianceBernstein (AB) LP (AB), at 18.7%. Finally, the Invesco (IVZ) Legacy Securities Master Fund LP garnered a net IRR of 18.2%.

Although the Treasury originally chose nine funds to participate in the PPIP program, TCW Group was forced to liquidate its fund in 2009 after its then-chief investment officer, Jeffrey Gundlach, was ousted.

“All of these managers are pretty savvy investors, so although some of their investment styles are varied, we were bullish on the entire program,” said Bryon Willy, a principal at Mercer Investment Consulting in Chicago. “We were not surprised at all that we saw that convergence of returns over time.”

In fact, a report that Mercer released in September 2009 (shortly before any of the funds' inception dates) revealed the consulting firm's estimates for final returns wound up hewing pretty close to the actual results.

“Our analysis estimates average annual net returns in the 15%-to-17% range for an equal-weighted average of 15%, 20% and 25% gross return outcomes,” the report stated.

Final PPIP fund returns

FundNet IRR since inception
Oaktree PPIP Fund26.3%
AG GECC PPIF Master Fund24.8%
Marathon Legacy Securities Public-Private Investment Partnership24.6%
RLJ Western Asset Public/Private Master Fund24.1%
BlackRock (BLK) PPIF23.1%
Wellington Management Legacy Securities PPIF Master Fund20.1%
AllianceBernstein (AB) Legacy Securities Master Fund18.7%
Invesco (IVZ) Legacy Securities Master Fund18.2%
Source: Treasury Department

Highest return

Of the eight chosen managers, Marathon had the highest return on capital with a net multiple of 1.76 times. BlackRock (BLK) was a close second with 1.74, followed by the Angelo Gordon/GE and Western/RLJ partnerships, both at 1.69. Next was Wellington, with 1.56; AllianceBernstein (AB), with 1.45; Oaktree, with 1.42; and Invesco (IVZ), with 1.23.

Despite each money manager seeing their funds close with relatively similar results, and despite being restricted to investing only in AAA-rated non-agency commercial or residential mortgage-backed securities, they all deployed different investment strategies. Six of the eight managers purchased both CMBS and RMBS.

“Ours was geared to be heavily weighted toward RMBS,” said Mr. Rabinowitz on Marathon's fund. “We ended up being about 90% to RMBS and 10% to CMBS.”

Angelo Gordon, meanwhile, changed its portfolio mix in its PPIF in 2011 to being overweight in CMBS from being overweight in RMBS, as Pensions & Investments previously reported.

While the bulk of the managers invested in a mix of commercial and residential, Oaktree purchased only commercial mortgage-backed securities. Invesco Ltd., on the other hand, bought only securities backed by residential mortgages.

Rich King, co-head of the U.S. taxable fixed-income and global high-income strategies for Invesco Fixed Income in Louisville, Ky., explained its fund could invest across the entirety of the mortgage market, so while Invesco closed the PPIP portion of the vehicle, it continued to invest in distressed real estate opportunities.

“The PPIP fund had strict guidelines, but in our view (it was) an opportunity to put money to work, not just in securities but also in loans,” said Mr. King about Invesco's fund, which was the first of the public-private investment funds to liquidate after generating the returns it set out to earn.

Although it wrapped up the PPIP portion in early 2012, the fund managed by Invesco subsidiaries W.L. Ross & Co., Invesco Real Estate and Invesco Fixed Income is still investing in distressed real estate.

The Treasury's report on the PPIFs reveals the program made its return on its investment. As of June 30, the Treasury received total gross distributions of $22.4 billion, made up of approximately $9.6 billion in net cumulative equity distributions, $12 billion in cumulative debt principal payments, $320 million in cumulative interest payments and $85 million in warrant payments. n

This article originally appeared in the September 2, 2013 print issue as, "Managers make hay with toxic mortgage funds".