In an environment with a fair level of uncertainty, credit specialist manager Ellington Management Group is attracting strong interest from asset owners, particularly from insurance companies.
Michael Vranos, founder and chief investment officer, noted in an interview that "this is one of the best yield-buying opportunities we've seen within the markets in which we have invested (for) decades."
He noted that the "extreme pace of rate hikes caught a lot of investors off guard. We see parallels to 1994 in that regard when I started the firm."
In addition to rate movements, Mr. Vranos said "the mortgage market has lost its two biggest buyers – banks and the Fed. Together they own nearly two-thirds of the market now," he said, adding that "banks are under pressure from losses on their securities and deposit flight to higher-yielding alternatives. The biggest buyers stepping back means less demand, putting upward pressure on spreads."
Ellington's investment teams managed a total of $9.7 billion as of Oct. 1 in three main strategies: diversified credit; mortgage prepayment relative value; and index-based traditional mandate solution portfolios for select institutional clients.
Mr. Vranos offered two examples of what the firm is investing in now.
"We are in an environment of higher rates and higher spreads creating incredibly attractive yields in structured credit for investors," Mr. Vranos said, noting AAA yields that are six to seven times more than they were two years ago. "It's just a completely different opportunity set as investors are considering the asset class."
Ellington's investment team also "can earn double-digit yields before leverage on seasoned mortgage credit bonds that would survive financial crisis-level defaults and home price declines," Vranos said, adding "we're talking about creditworthy borrowers who refinanced in 2020 and 2021 now with 50% of their equity in their homes and a sub-3% rate."
Vranos said interest from new institutional investors is high, stressing "we are seeing greater demand for our strategies from our clients, the vast majority of which are institutional because of higher rates and higher spreads for fundamentally sound assets."
"We've been in these markets for 30 years. We're not tourists," he stressed.
"We understand the return distribution around these assets, how to think about risk and return, along with technology and modeling experience to underwrite each individual asset to the benefit of investors," he said, adding "for asset owners, these market changes are an obvious opportunity."
Vranos said the company "has seen very strong, incredible interest and investing in the firm with a growing number of insurance company investors that, like other asset owners, are looking for portfolio safety."
"The insurance company bid has become increasingly significant in providing a diversification of capital sources for structured products, including non-qualified loans, and therefore want to take advantage of higher interest rates and are seeking longer-term mortgages and residential whole loans more broadly," Vranos said. He observed that "the residential loan market is massive. We are seeing more insurance companies turning to the asset class."
"Insurers have long-term liabilities and therefore want to take advantage of higher interest rates and are seeking longer-term debt," Vranos said, noting that "insurance companies are turning to asset managers like Ellington which have built platforms to manage the loans and deep analysis of loan portfolios."
Ellington Management's insurance solutions group manages about $1.8 billion of funding and commitments of the firm's total AUM.
