Global Securitized Strategy

Overview
Investment Approach
Portfolio Manager

Overview

Strategy Facts

Capability:	Fixed Income
Strategy Inception:	December 2012
Benchmark:	Bloomberg U.S. Mortgage Backed Securities (MBS) Index

Strategy Facts

Capability:	Fixed Income
Strategy Inception:	December 2012
Benchmark:	Bloomberg U.S. Mortgage Backed Securities (MBS) Index

Summary

The Global Securitized Strategy is a differentiated, value-driven approach to investing in securitized debt. The strategy seeks to provide an attractive rate of return through investment in a portfolio of mortgages and securitized debt instruments issued by government agencies and private institutions. The strategy applies a consistent, thematic, targeted bottom-up approach investment process that combines global macro fundamental analysis, thorough research and analysis of industry trends to create a diversified portfolio of securitized instruments.

Investment Approach

Philosophy

The team believes that successful investing in securitized debt requires a long-term perspective, a disciplined investment process, and a commitment to research. They believe superior long-term returns can be achieved by combining strategic portfolio-structure decisions with sensible valuation methodologies for selecting specific investments. Careful analysis of mortgage market fundamentals must be grounded in price-valuation disciplines, and these analyses must be re-examined on an ongoing basis to ensure their continued value.

Securitized product transactions are over the counter (“OTC”) and span many different time zones and geographic regions. With a new issue market and scattered secondary market, the ability to effectively transact on an idea makes a substantial difference. As experienced and informed investors the team is better equipped to assess both the historical and current risk/return profile of a security. Additionally, they emphasize the importance of knowing how to engage with the market, and where to source investment offers.

Differentiators

The Experience of the Firm and breadth of the team

The team's senior management team has an average of over 17 years of investment experience and have invested through a number of credit and prepayment cycles. They have established a structured approach to investing, which integrates research with portfolio management and trading.

Advanced Proprietary Analytics

The team's proprietary models focus on three analyses: prepayment, borrower credit/default and default recovery. These data-intensive models utilize loan-level data such as up-to-date credit bureau records, and asset transaction information (by product type and to the zip code level) to assess information such as each borrower’s mark-to-market Loan to Value (LTV). Prepayment models focus not only on interest rate incentives, but also on borrower ability to refinance due to credit and eagerness to provide the necessary documents and money.Credit models use updated FICO scores to gauge the potential for borrower defaults. The recovery model focuses on asset values and potential recovery costs.

Exceptional Structural Knowledge

The securitized products team’s deep knowledge of capital structures and their inherent strengths and weaknesses is a significant competitive advantage in exploiting inefficiencies in the securitized products market. The team's ability to reverse-engineer deal cash flows allows them to fully understand structures. Regardless of a deal’s structuring, its cash flows in total cannot be more than those of the underlying collateral (creation value). Utilizing this, the team can compare creation value of securities versus their market price and identify those that are fundamentally cheap.

Investment Process

1	Value identification
	Our approach to identifying value starts with a strategic review of the securitized universe, including macroeconomic trends in the capital markets and where we are in the economic and business cycle. We also look at interest rate trends, the yield curve and volatility in the market. Sector themes including demand from the Government Sponsored Enterprises (GSEs), banks, overseas investors and major domestic institutions as well as relative value themes are of importance in this top down review. Next we take a look at the relative value in the universe and drill down further into the bottom up security selection process including analyzing and determining our yield curve strategy and individual security types.
2	Implementation
	To ensure implementation of the most appropriate collection of value ideas, senior representatives drawn from the various research teams review the broad opportunity set and establish systematic risk targets for portfolios; portfolio managers then create portfolios to attain these targets, subject to applicable guidelines and constraints, and a team of dedicated traders then executes the trades.
3	Evaluation
	Our evaluation phase involves the use of our proprietary risk management and attribution systems; these systems allow us to measure and manage portfolio risk on a daily basis, and help assess the impact of our key investment decisions on investment performance.

Portfolio Manager

Gregory A. Finck

Co-head of Mortgage and Securitized

32 years industry experience

Effective 16 December 2022, Matthew Buckley was added as Portfolio Manager on the Strategy and Neil Stone is no longer serving as Portfolio Manager on the Strategy.

RISK CONSIDERATIONS

Diversification does not protect you against a loss in a particular market; however it allows you to spread that risk across various asset classes.

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In the current rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. Longer-term securities may be more sensitive to interest rate changes. In a declining interest-rate environment, the portfolio may generate less income. Some U.S. Government securities are not backed by the full faith and credit of the U.S., thus these issuers may not be able to meet their future payment obligations. Collateralized mortgage obligations (CMOs) can have unpredictable cash flows that can increase the risk of loss. Mortgage-backed securities are sensitive to early prepayment risk and a higher risk of default and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Investments in each class of Stripped Mortgage-Backed Securities (SMBS) are extremely sensitive to changes in interest rates. Interest Onlys tend to decrease in value substantially if interest rates decline and prepayment rates become more rapid. Principal Onlys tend to decrease in value substantially if interest rates increase and the rate of prepayment decreases.

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Past performance is no guarantee of future results.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Any views and opinions provided are those of the portfolio management team and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

All information provided has been prepared solely for information purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

OTHER CONSIDERATIONS

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The Bloomberg Mortgage Index covers the mortgage backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). This Index is the Mortgage Backed Securities Fixed Rate component of the Bloomberg U.S. Aggregate Index.

“Bloomberg®” and the Bloomberg Index/Indices used are service marks of Bloomberg Finance L.P. and its affiliates, and have been licensed for use for certain purposes by Morgan Stanley Investment Management (MSIM). Bloomberg is not affiliated with MSIM, does not approve, endorse, review, or recommend any product, and. does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any product.

The information presented represents how the portfolio management team generally implements its investment process under normal market conditions.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.