Investors looking for income in the current environment may want to turn to securitized products, according to Bryan Whalen, chief investment officer and portfolio manager at Los Angeles-based TCW. Right now investors are in “the waiting place” for the next few months as the direction of the economy gets sorted out, said Whalen. While the outcome is still uncertain, Whalen thinks the economy will likely weaken more than the market expects. Yet in many parts of the bond market, investors aren’t being compensated for credit risk, he said. Key inflation data comes out this week, with the May consumer price index due on Wednesday and the producer price index released on Friday. “There’s a chance everything’s all right and it all works out and smooth landing and no landing and all [those] plane analogies. However, if that’s the case, that seems to be already embedded in what you get paid to take risk in corporate bonds and high yield bonds and things like that,” Whalen said in an interview with CNBC. “If it’s not the case … it feels like there needs to be a repricing.” The money manager is on a TCW team that oversees more than $170 billion in fixed income assets. While corporate credit is rich, securitized assets are relatively cheap, he said. The latter make up about two-thirds of the assets in the TCW Flexible Income ETF (FLXR), which Whalen co-manages. FLXR YTD mountain TCW Flexible Income ETF year to date The exchange-traded fund has a 5.9% 30-day SEC yield, as of May 31, and a 0.4% expense ratio. It aims to generate consistent income and deliver long-term capital appreciation, and is meant to serve as a complement to a traditional fixed-income portfolio rather than replace it, Whalen said. “We’re trying to balance a total-rate-of-return mindset — which is [to] stay high quality, stay liquid, so that we can take advantage of bond market dislocation in the future — with still trying to deliver good income for our shareholders,” he explained. “From our perspective, the best way to do that is high-quality securitized [debt], which is offering decent spread levels and decent compensation.” Breaking down the portfolio The allocation to securitized assets is distributed between agency mortgage-backed securities (MBS), non-agency mortgages, asset-backed securities and commercial-mortgage-backed securities, Whalen said. Agency MBS, largely from Fannie Mae, Freddie Mac and Ginnie Mae , is essentially the highest quality asset you can buy after Treasurys, since they are seen as indirectly or directly backed by the government, he said. Those securities are expected to benefit, “in an environment where yields are still bouncing around — and you’re not going to expect that to tighten in — but you are getting paid a decent income while you wait for an eventual remediation in the price and or in the spread,” Whalen said. For the trade to work, you have to have a long-term view that interest rates will come down at some point and volatility will subside, he noted. “We’ll get through ‘the waiting place’ and we’ll get to a steady-state yield curve that should also bring in, maybe, buyers that have … certainly pulled back from the market in the last few years,” he added. Non-agency mortgages have less interest-rate sensitivity and therefore are not as volatile, he noted. Meanwhile, asset-backed securities are essentially a compilation of many different sub-asset classes. “Asset-backed securities really allow you to tailor the specific receivable you want to have exposure to — and then you can pick which parts of the capital structure” to get paid from, Whalen said. “For us, because we’re defensively leaning, we can buy good structures at the top of the capital structure, get a floating-rate coupon for anywhere between, let’s call it, about 100 basis points over SOFR.” The Secured Overnight Financing Rate, or SOFR, is a benchmark interest rate for bonds and loans. Within this space, Whalen likes collateralized loan obligations (CLOs), which are pools of floating-rate loans to businesses. He favors CLOs tied to single-family rental loans, data centers and assets related to the electrification of the economy. Lastly, while there is still a “fundamental dark cloud” hanging over the commercial MBS sector, partly due to the outlook for office real estate, there are still areas of opportunity, Whalen said. He specifically likes those assets that focus on a single property, rather than a pool of many properties. “When you buy these bonds, particularly at the top of the capital structure, these underlying loans don’t allow a lot of prepayment risk,” he said. “The prices or the spreads aren’t really subject to interest rate volatility.” You can also get anywhere from about 100 to 200 basis points over Treasurys for top tier portions of the capital structure, he noted.
