Mortgage-Backed Fixed Income

Philosophy

Summit’s Mortgage and Asset-backed team seeks to provide superior, risk-adjusted returns by identifying undervalued securities through a disciplined investment process coupled with prudent risk diversification.

Strategy

Process
The Mortgage-Backed Securities (MBS) team applies both top-down and bottom-up analysis on every security that is a candidate for investment. Top-down analysis is done on a quarterly and annual basis to establish the sector outlook, originator/servicer profile and relative vale. Candidate securities are verified as eligible against investment compliance and investment policy guidelines. The MBS team uses bottom-up analysis to identify fundamentally sound credit.

Security Selection
The MBS team develops a thorough understanding of all aspects of a transaction, including rating methodology, collateral characteristics, and deal structure before selecting specific securities.

The team develops an understanding of each rating agency’s overall method for the asset class. We procure all available transaction reports, including pre-sale reports, press releases, and surveillance reports, and stay in contact with the rating agency analyst regarding trends.

Summit’s MBS team examines the distributions of all collateral characteristics, not just the averages, to identify any outliers in distribution. We compare collateral characteristics to prior deals to identify any underwriting “drift,” and we compare collateral characteristics to peer deals to determine if risk is adequately priced in the market.

In reviewing the deal structure of the securities, we ask questions such as, what levels of loss results in reduced yield and lost principal? How do the levels above compare to historical experience of sector and originator? Does level of credit enhancement appear consistent with collateral risk? Does level of credit enhancement appear consistent with peer collateral? What combination of deal characteristics and scenarios impact rating?

Surveillance and Monitoring
The MBS team applies both quantitative and qualitative methods to ensure performance of the portfolio. Quantitatively, monthly performance data are imported into the database as efficiently as possible. The team uses the database on an individual security basis for trend analysis, and across the universe of transactions to spot outliers. Qualitatively we continuously monitor Wall Street and rating agency commentary. We make phone calls to trustees to discuss discrepancies in remittance reports versus PSA, and we monitor collateral characteristics throughout the transaction to aid in spotting anti-selection.