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Not All Mortgages Are the Same
Fixed Income Perspectives: An Educational Series
By Douglas Gimple
  • The mortgage-backed securities market has grown into a diverse market, offering investors a multitude of differentiated products to meet specific needs.
  • Agency and non-agency mortgage-backed securities have historically provided attractive yields and high credit quality, as well as a wide variety of available securities.
  • The market is complex and ever-evolving, but there are opportunities for managers to leverage different types of mortgage-backed securities to mitigate risk.
  • At Diamond Hill, we believe security selection is key and apply a bottom-up approach to identify, and capitalize on, market inefficiencies.
The Evolution of the Asset-Backed Securities Market
Fixed Income Perspectives: An Educational Series
By Douglas Gimple
  • Growth in the asset-backed securities (ABS) market over the past 10 years has provided diversification and strong risk-reward characteristics in a sector largely ignored by the Bloomberg Barclays U.S. Aggregate Index.
  • As growth in some historic sectors of the ABS market slows, the emergence of new securitization sectors has expanded the opportunities available to investors.
  • The Diamond Hill fixed income team is able to exploit some of the pricing inefficiencies in the ABS market through our bottom-up analysis, along with our deep understanding of deal structures and the companies bringing them to market.
The Case for a Strategic Allocation to High Yield
Fixed Income Perspectives: An Educational Series
By Douglas Gimple
  • The high yield market has come a long way since its creation in the early 1970s, evolving from a tactical asset class to a significant component of investors’ asset allocation.
  • Dispelling the myths around the asset class is key to understanding the opportunity and value provided by high yield corporate credit.
  • Understanding the nuances of the high yield market can provide investors with exposure to the asset class while potentially avoiding some of the pitfalls of benchmark construction and ETFs.
The Universal Benchmark for U.S. Fixed Income
Fixed Income Perspectives: An Educational Series
By Douglas Gimple
  • Antiquated rules and strict limitations result in a benchmark that fails to capture the entire investable universe but provides opportunities for diligent managers.
  • Changes in the market since the Financial Crisis have led to a dramatic evolution of the benchmark.
  • Focusing upon the best risk/reward opportunities in the market positions Diamond Hill to take advantage of market dislocations driven by benchmark construction.
Property Assessed Clean Energy
Fixed Income Perspectives: An Educational Series
By Douglas Gimple
  • Property assessed clean energy (PACE) programs are a way for property owners to finance energy-efficient renovations.
  • Residential and commercial PACE programs have grown substantially over the past several years, though the securitization of these loans is still in the early stages.
  • Looking beyond the standard lineup of asset-backed securities allows Diamond Hill to add value for our clients.
Marketplace Lending
Fixed Income Perspectives: An Educational Series
By Douglas Gimple
  • The asset-backed securities market has expanded since 2008, with new types of securitization including marketplace lending.
  • The marketplace lending industry offers a yield advantage for investors who can exploit inefficiencies in this new and growing market.
  • Looking beyond the standard lineup of asset-backed securities allows us to add value for our clients.
Mechanics and Benefits of Securitization
Fixed Income Perspectives: An Educational Series
  • Securitization is not a new concept. In its most basic form, securitization dates back to the late 18th century. The first modern residential mortgage-backed security was issued by the Government National Mortgage Association in 1970, fueling a dramatic expansion in the housing market.
  • A securitized deal begins with an agreement between a lender and a borrower as to the amount borrowed, interest rate paid, collateral to secure the loan, and loan maturity. The borrower’s obligation is then sold or pledged to a trust along with a variety of other similar loans, creating the securitized product.
  • Securitized issues are split into tranches, which are categorized into varying degrees of subordination. Each tranche is separate and distinct from the other tranches, and each has a different level of credit protection or risk exposure.
  • The primary benefit of securitization is to reduce funding costs. Through securitization, a company that is rated BB but maintains assets that are very high in quality (AAA or AA) can borrow at significantly lower rates, using the high quality assets as collateral, as opposed to issuing unsecured debt.
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