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A Quality Fixed-Income Fund

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Bond fund manager Brad Friedlander tells MoneyShow.com how he seeks dividends and manages risk using non-agency mortgage-backed issues.

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Kate Stalter: Today, our guest is Brad Friedlander, managing director and head portfolio manager at Angel Oak Capital. Brad, I wanted to talk specifically about the Multi-Strategy Income Fund (ANGLX) today.

You're in the bond market. You use a value-based analysis. Give us the big picture view of what this fund is.

Brad Friedlander: Sure, Kate. Well, the Multi-Strategy Income Fund is certainly an income-oriented fund. It's a fixed-income bond fund. That continues to be our focus.

We're targeting 6%-plus annual dividends. Those dividends are paid on a monthly basis. We continue to scour for value across the fixed-income universe.

You know, many of the assets that we're looking at are those that may have been branded toxic years ago, during the housing crisis and during the mortgage crisis, but the market's just begun to find some value in those. Those particular bonds are non-agency and mortgage-backed securities. Those bonds comprise roughly 80% of the fund.

Kate Stalter: You just touched on something I wanted to ask you about, which is the fact that in the past, these have had kind of a bad rap. They are usually higher-yielding, as I understand, than the agency-backed. Tell us what you're doing to seek out quality in this area.

Brad Friedlander: Sure. Well, like I mentioned, we're certainly value seekers. We pride ourselves on the ability to take advantage of really the stigma, the fear, and some of the dislocations that have been created from the housing crisis and the mortgage crisis. That's really where we see value.

Now, as far as our ways of taking advantage of that, we've decided to focus on a particular niche of the market that's a significantly higher subset of the mortgage market. These are really just loans from all over the country that were originated many years ago and they've been securitized into bonds, and those bonds are trading in the secondary markets.

We decided to focus on bonds that were originated back in 2003 to 2005, when the credits were significantly better, the underwriting was better. And we focus on prime and near-prime loans, rather than subprime. Because we have more flexibility, it enables us to focus on a much higher quality subset of the market.

Kate Stalter: I was looking at some of the Morningstar data. That is really the primary area for the holdings of the fund, but you have some other categories of bond holdings as well. Is that right?

Brad Friedlander: Yeah. You know, the fund certainly has a vast majority in non-agency mortgage bonds. That's certainly 80% of the fund.
We do have a basket of the fund that's what we deem to be extra-liquid holding agency debt, government guaranteed mortgages, Fannie and Freddie mortgages. That continues to be a focus of the fund, and will always be.

We foresee a whole continuum of opportunities over the next three to five years. The commercial side of the credit and the mortgage-backed security arena may look more attractive when rates rise. The student-loan market is potentially a ticking time bomb, especially on, of course, the private side of the student-loan market.

We foresee opportunities years and years ahead. We expect to certainly shift up the allocations. But for now, we continue to overweight non-agency mortgage bonds, and we certainly believe that there's value there.

Kate Stalter: As you know, there are a lot of advisors and analysts, fund managers-everybody has their own opinion and their own take on the market. A lot of them are saying now is not the time to be in fixed income. What is your response to that?

Brad Friedlander: Yeah. I mean, that argument certainly has some credit, and has some merit to it. When you think of fixed income, you obviously think of interest-rate risk. You think of long-duration and long-maturity munis and US Treasuries.

What's different about the particular area of the markets that we tend to focus on is they're really not interest-rate intensive. The durations are very low, typically between one and three, and many of the actual loans, or the bonds that are trading or that we focus on, tend to be floating-rate in nature. So there's really not a lot of interest rate risk there.

Half of our fund tends to be floating rate. So as rates rise, income for the fund you would expect to rise in lockstep with that. So, that tends to be what we focus on.

Certainly, there is some merit in concerns with the rates eventually rising, if you have a ten-, 20-, 30-year perspective on interest rates. Obviously, we know that the Fed may be grounded here for the next few years.

But certainly down the road, you would want to bake in significant interest rate increases, and so you want to prepare for that. We think the types of products that we're focusing in the fund make a lot of sense.

Kate Stalter: I wanted to also ask you today, the last question: I realize being the fund manager, you're not going to be advising people on how to use this. But I know that you talk to a lot of the advisors and a lot of the asset managers who put their clients into various portfolios. How are you seeing this used in the advisors' client portfolios?

Brad Friedlander: That's a great question. I would say in two distinct ways. My experience and my conversations that have been, over the
last three to six months, many investors have been looking for potentially, what you'd call a pure play.

The fund has been identified as one that certainly has a higher allocation to non-agency mortgage bonds, and is a potential way for investors to express a view in a potential housing recovery, and they have a liking for non-agency mortgage-backed bonds. So as a pure play, it's worked on a one-off basis.

And then the second way we've noticed is that many investors-especially whether it's through the advisor networks-already have some exposure. There are funds that may have a 10%, 20%-plus allocation to non-agency mortgage bonds, but they're pretty fixed at that point.
Some investors would like the ability to tweak that number, and they're able to do that independently, by either adding or subtracting the Multi-Strategy Fund alongside that. They believe in the credits. They believe in the general theme in non-agencies, and they really want to be able to augment some of their exposure that they may already have in it.


Editor's Note: This article was written was originally published by MoneyShow.

Below, find some more great investing and trading content from MoneyShow:


6 Income Funds for the Bernanke Era
Income Funds: Getting the Balance Right
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