Sam Dunlap is a Managing Director and Chief Investment Officer of public strategies at Angel Oak Capital Advisors and serves as a Portfolio Manager for the Angel Oak Multi-Strategy Income Fund and the Angel Oak Multi-Strategy Income UCITS Fund.
He also manages some of the separately managed accounts for the Advisor’s clients. Mr. Dunlap joined Angel Oak in 2009, and serves as a voting member of the firm’s public funds Investment Committee.
He has also been featured as a television guest on Bloomberg, CNBC, Fox Business, and TD Ameritrade Network as well as quoted in Bloomberg and Barron’s.
He began his capital markets career in 2002 and has investment experience across multiple sectors of the fixed-income market. Prior to joining Angel Oak, he spent six years marketing and structuring interest rate derivatives with SunTrust Robinson Humphrey where he focused on both interest rate hedging products and interest rate linked structured notes.
In this 2,672 word interview, exclusively in the Wall Street Transcript, Mr. Dunlap details the financial thesis for his short term high yield fixed income portfolio.
“As far as volatility is concerned and to your point on volatility within the U.S. — whether it relates to capital markets or U.S. growth ahead, for example — we do think that the Fed and the recent commitment to the zero bound and QE4 is an incredible volatility suppressant, particularly for risk assets.
Hence the mortgage allocation, as I mentioned, is the overweight within the fund at over 65% of the allocation.
Given how profound the Fed’s commitment is to QE4 and buying agency mortgages, we’ve seen interest rate volatility collapse just as you’ve seen volatility collapse across all the risk markets, including the VIX.
We believe this is hugely supportive to continue to suppress volatility, which is supportive for mortgage credit, generally speaking. We think our volatility outlook for the years and months ahead bodes well for the mortgage allocation.
Our goal is to provide investors with the best relative value that will pay over the long run credit cycle, and in addition to low volatility, the U.S. mortgage credit market has been benefiting from positive fundamental credit attributes.
The Fed’s commitment to the zero bound and buying mortgages, as well as collapsing interest rates has been hugely supportive for U.S. housing, which from a fundamental perspective, improved the credit risk profile of the bonds we target within non-agency RMBS.
There were some questions to your point on volatility in the U.S. economy surrounding unemployment and rising delinquencies in RMBS due to the pandemic. As we took a step back and reflected on the post-COVID environment from a top-down standpoint and what it meant for RMBS, we were reminded we were very bullish towards U.S. housing and non-agency RMBS going into COVID due to the incredible supply and demand dynamics supporting U.S. housing.
There’s just a general shortage of supply and rising demand. We became even more bullish towards U.S. housing and non-agency RMBS post COVID. We have been pleasantly surprised to say the least with what has transpired post COVID as it relates to housing and RMBS.
The performance has been extraordinary.
It was not immune to what we saw with the volatility during the March period. As all credit products were particularly hard hit, mortgage credit was not immune to similar spread widening, but the fundamental credit aspects that back the bonds we target have improved dramatically post COVID.
I don’t anticipate potential volatility ahead to change our current outlook and backdrop to the macro tailwinds that benefit mortgage credit over the medium term.
One of the things that we have shifted towards post COVID are more areas of consumer ABS — that is an area that has benefited from similar macro tailwind to mortgage credit.
Rates obviously collapsed on the front end and improved financing costs has really benifitted areas like auto ABS. Additionally, U.S. consumers were in solid shape going into COVID, and in our opinion, U.S. consumers were very well positioned to stave off the worst from the pandemic.
Personal savings rates as a percentage of disposable income were rising going into the COVID crisis, and they subsequently spiked to post-WWII all-time highs. We and other market participants took note.
We believed there were some excellent opportunities within the consumer ABS space, particularly auto ABS coming out of the COVID environment.
That has, again, been a pleasant surprise given our outlook, as used car prices increased dramatically — similar to the dynamic for U.S. houses.
We felt, even if the U.S. consumer were to fall under more undue pressure by not passing additional stimulus, the collateral value that backs the auto ABS were improving in a dramatic V-shaped fashion.
Consumers not only bought homes to escape the ills of the COVID crisis, but they also bought cars.
Our allocation targets were consistent going into the COVID crisis, but that gives you a sense of how we thought of it coming out.
CMBS is an area we actually decreased the allocation after the COVID-related volatility. Commercial real estate is a sector where we have concerns about the integrity of the long-term leases in areas like retail, which was a concern for us prior to COVID; office, given the acceptance of the work-from-home environment; and hospitality, which has been particularly hard hit.
Prior to COVID we were biased towards being up in quality in CMBS. Post COVID we not only maintained our up in quality bias, but we have predominantly targeted agency-backed CMBS in the post-COVID environment.”
A short term high yield fixed income portfolio is difficult to achieve in this market environment but Mr. Dunlap has centered his portfolio on low volatility assets that he believes in.
“Angel Oak Capital Advisors manages approximately $10.8 billion in fixed income. We focus on the U.S. structured credit markets and predominantly in mortgage credit.
This fund from a strategy perspective is approximately $7.4 billion in size. We also have a UCITS version of this fund as well, the Angel Oak Multi-Strategy Income UCITS Fund.
What we seek to identify within the U.S. structured credit markets provides a unique allocation for investors seeking high current income and a unique allocation away from traditional fixed income in the U.S. structured credit markets.
This fund has a unique allocation and an overweight to non-agency RMBS and predominantly legacy non-agency RMBS — bonds that were issued prior to the global financial crisis. It has over approximately 65% of the allocation towards non-agency RMBS.
The allocation gives investors high current income, with a relatively short effective duration profile, which we think is unique given the current environment of historic fiscal and monetary stimulus.
Here, at the zero bound, we are seeking to provide investors high current income, with low interest rate sensitivity.”
Read the complete details of how Angel Oak has developed this short term high yield fixed income portfolio for individual investors by reading the entire 2,672 word interview with Sam Dunlap, exclusively in the Wall Street Transcript.