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24 opens access to residential mortgage-backed securities

Credit specialist TwentyFour Asset Management has made the residential mortgage backed securities market available to UK retail investors by launching the Monument bond fund, distributed by Gemini Investment management.

The fund aims to provide investors with a stable and predictable income witha degree of capital preservation by investing in residential mortgage-backed securities. These are bonds that are issued to finance a bundle of residential mortgages.

Mortgage pools are ringfenced, removed from the lenders¹ balance sheet and transferred into a trust. The mortgage repayments that are received from homeowners are used to pay interest to bond holders and return their capital, but the mortgages are still serviced by the lender.

The most senior residential mortgage backed securities are rated AAA and will form the bulk of the Monument bond fund’s portfolio. They will typically be hit by losses only if a property is repossessed and sold for less than the mortgage, as they rank behind other parties and bondholders in the line to absorb losses.

The homeowner is the first in line to take a loss, followed by the lender who will lose any profit that was expected from the mortgage, then the lower rated bonds, starting with BBB, followed by A, AA and finally AAA rated bonds.

RMBS are usually floating rate, so the interest they pay goes up if interestrates rise. TwentyFour says this means the fund¹s price should remain relatively stable regardless of rate moves, which contrasts corporate bondfund prices that tend to fall when interest rates rise.

Residential mortgage backed securities in the US were a big factor incausing the credit crunch but were focused mainly on the sub-prime market.TwentyFour will avoid the US to focus on the higher quality UK, European and Australian markets and will keep the underlying mortgages under constant review.

Yields have historically been low in these markets but are currently highbecause the credit crunch forced many investors to sell regardless ofquality. It is now possible to buy quality bonds at low prices, which is an anomaly that this fund sees as an opportunity.

TwentyFour¹s investment team has the experience to understand theopportunities and pitfalls, but some investors may be put off by the complexity of the market in the aftermath of the credit crunch and concernsabout liquidity.


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