A Broadly Diversified Securitized Credit Strategy
Voya Securitized Credit Fund
Dave S. Goodson
Author: Ticker Magazine
Last Update: Apr 25, 8:30 AM EDT
|Recognizing that securitized credit markets can and do rapidly change, Dave S. Goodson, portfolio manager of Voya Securitized Credit Fund, stresses the importance of a dynamic approach, nimbleness and diversification to generate steady returns through the cycle. Investing across the entire spectrum of securitized credit, the fund relies on its long-term team expertise, on balancing the top-down and bottom-up perspectives, and on keeping risk management at the forefront.
ďThe credit crisis, which created extreme distortion in the markets, left generational opportunities in its wake. Many fund managers have harnessed it in a focused way with a finite horizon. We think that securitized markets are better harnessed in a broad based fashion and offer outperformance through the cycle.Ē
Q: Could you give us an overview of the fund?
The fund is fixed income and, more specifically, the vast majority of the risk we take is focused on the securitized credit portions of the market. It is important to note that about 80% of total securitized supply comes with government guarantees. Our fund is more focused on the part of the market that doesnít have that guarantee, so credit risk is the dominant form of risk that we take.
The fund is relatively new, since August, 2015. The launch of the fund followed a long period of time, when our team was managing securitized credit assets on behalf of Voya and its predecessor, ING. For us, the fund is another way to deliver securitized credit solutions to the investors, who cannot access the securitized credit markets on their own or via a separate account, or otherwise prefer a commingled, easy to access investment vehicle.
Q: What differentiates your fund from its peers?
One unique feature is that our fund has meaningful amounts of exposure across the securitized credit universe, including in Asset-Backed Securities (ABS), Collateralized Loan Obligations (CLOs), commercial mortgage-backed securities (CMBS), and Residential Mortgage-Backed Securities (RMBS).
Another differentiator is that we attempt to maintain a portfolio that will generate returns through the cycle, as opposed to focusing on trades with finite investment horizons. The credit crisis, which created distortion in the fixed income markets, also caused a generational opportunity. Many mutual fund managers harness that opportunity in a focused way, while we think that securitized credit markets can be harnessed through the cycle. I believe that our approach is unique because of the complete usage of all the securitized groups in a diversified way, with the goal for through-the-cycle outperformance.
Lastly, we differ from our peer group by maintaining focus solely on securitized credit, and doing so with the strength of an institutional quality, top tier sponsor like Voya.
Q: What are the core beliefs behind your investment philosophy?
The key tenets of our philosophy are reflected in the way we have built our investment platform. First, we believe that our markets are dynamic. They can and do change rapidly, so the managers in the space need to have a dynamic approach, to be nimble, and to be prepared for constant change. Therefore, our process is designed to be dynamic and balanced.
There are two separate ways in which we balance the fund. First, we consider the top-down drivers of risk taking in our market as well as the bottom-up drivers. Second, we balance the use of qualitative versus quantitative information. In some cases, we rely on more subjective information versus the quantitative, statistically-based data, which is readily available in securitized markets. It depends on what we believe drives value at the time. We have to be able to balance the inputs, which have varying degrees of merit and relevance at the particular time. We believe that by balancing the inputs, we can best take advantage of the markets will continue to change rapidly over the course of a cycle.
Another key aspect of our philosophy is that risk management is at the forefront. We view ourselves as investors as being the first line of defense from a risk standpoint for our clients. Now, we have powerful partners internally as an independently reporting risk team, but ultimately, we believe that our securitized investors, or risk takers, have to be effective risk managers. We do not seek equity-oriented risk taking in our approach. Instead, we aim to provide a consistently good, reliable source of positive returns for our clients.
We recognize that one of the most efficient ways to manage risk is diversification and we constantly seek for ways to manage concentrations and further diversify our portfolio risks. Markets can move quickly and our upside/downside can change fast, so we are constantly trying to mitigate that, with diversification a key tenant.
Q: What is your investment process?
There are three key steps of the process before we include the right ideas in the portfolio. They should not be thought of as sequential steps, but are constantly working together. One part of our process is refining our view on the universe from a top-down macro perspective. We try to assess all the different macro forces that will impact the risk in our market. From these inputs, we can spawn micro ideas, with specific cusips in the securitized markets that can have an impact on the portfolio, or it can of course influence higher level sector positioning from a macro perspective.
On the other side of the equation is our bottom-up process. That part includes assessing factors that drive the security selection in the securitized credit market and narrowing down the universe from tens of thousands of securities to the precious few that are good enough to hold in the fund for our investors. So, while there is a top-down element that can drive micro ideas, the bottom-up aspect provides a natural and typically more directly relevant set of inputs for our security selection decisions.
As an aside, the majority of our platform costs are tied to making the correct security selection decisions. We view this as our primary responsibility to judge correctly, both at the time of investment and every day we own the position.
Bottom line, the top-down inputs and the bottom-up factors, when correctly assessed, provide the team with the valuable levers to optimize the chance for through the cycle success for our investors.
The third part of the process is constructing the portfolio and balancing the top-down inputs with the bottom-up parts in a seamless way. We canít make mistakes from a compliance or risk perspective. The idea of the portfolio construction is to tie everything together in a balanced way, which properly reflects real information and the risks we intend to take. In this vein we are also considering the constraints that we have in the mutual fund construct.
Q: How is your team organized?
Each of our team members is not only a researcher, but also a trader. We donít divide the labor by function; we segment the team by sectors. Different individuals are focused on different parts of the market, such as ABS, RMBS, CLOs, or CMBS. Thatís the design of our structure and we think it is critical. We have owned many of the bonds since inception and weíll likely continue to do so. In many cases these bonds have been outstanding and traded for more than 10 years with the same collateral. So, we believe that it is really important to have a seamless approach to both research and trading.
Q: How do you narrow down the universe to select securities? Could you give us some examples?
A good example would be the credit risk transfer, or CRT. It is a relatively new part of the securitized credit universe, which confirms the philosophy that securitized markets are extremely dynamic and fluid. The CRT market just started in the last 5 years and now is a self-sustaining, living and breathing capital market in its own right.
In our approach, we make sure that the investments make sense from an asset allocation standpoint. When selecting the right securities in a relatively new market, a key factor is having a team with dedicated experience. On the securitized credit side, we have a team of eight people, including myself, and most of us have traded together since before the credit crisis. We have a lot of understanding of the types of risks or structures that can perform through the cycle, and we felt that CRT had the hallmarks of the specific risk type.
At the security level, the assessment has several dimensions. In terms of risk and valuation, the collateral comes first. Within the CRT sector, we actually take the loan-level data to review the risk in this asset class. The second dimension is structure. We have to be able to analyze the structures, to understand the priority of payments, the cash flow, what part of the capital structure has the lowest priority, the most risk and the most leverage to that collateral. When structure and collateral come together, we can make the optimal risk/reward assessment to invest in the securitized bond.
As part of the analysis of the CRT structure, we evaluate how much subordination we have and what our priority of payment in the capital structure is related to that collateral. In some cases, when we have positive view on the collateral, we may be willing to accept less structure because we believe we will be compensated for taking more collateral risk. The goal of the assessment is to secure a positive outcome for the investors and long-term outperformance.
The third dimension is evaluation of the parties involved, because we donít want the risk associated with the underlying corporate entities to negatively or otherwise unduly affect us. So we spend time evaluating the various entities that somehow impact the cash flow associated with the collateral. These parties could be the originators or the servicers of the assets, the rating agencies involved and even the distributing counterparties of the bonds themselves. In the case of CLOs, to use another example, it could be the actual manager of the assets.