With recent economic growth in the U.S. slowing to an annualized rate of 2% and forecasts of further slowing in the quarters ahead, U.S. Treasury rates have rallied significantly. We would like to reinforce the resilience of the asset class in an uncertain interest rate environment.
Commercial Mortgage-Backed Securities ("CMBS") can be a distinctive and adaptable fixed income investment vehicle. In this two part Ladder Insights Series, we reiterate reasons why CMBS can be an "all-weather" asset class.
1. High Credit Quality Secured by Hard Assets
Banks maintain their liquidity and lending capacity by selling commercial mortgage loans to Wall Street. Investment bankers create CMBS by pooling and securitizing these loans. The newly-minted CMBS are then offered to the investing public as bonds.
Because banks today are adhering to conservative underwriting standards, CMBS bonds tend to be of a very high credit quality. Many receive “AAA” credit rating, the highest rating available.
Unlike traditional bonds, which are backed only by the implied credit of the entity that issues them, CMBS are directly secured by first mortgage claims against the commercial real estate collateralizing the bonds.
Most commercial and regional banks in America participate in the CMBS market; tens of billions of dollars in new CMBS are issued every quarter of every year. According to industry data, the total size of the CMBS market was more than $1.1 trillion as of December 31, 2018. The secondary CMBS market is transparent and robust.
Banks benefit by having a dependable, renewable source of capital they can lend to their customers. Similarly, commercial real estate professionals benefit by having a reliable and readily available funding source.
In the past, the complexity of trading CMBS and the lack of available investment products tailored to CMBS precluded individuals and all but the largest and most savvy institutional investors from buying CMBS. That has changed. With the development of a liquid, regulated, and widely accessible secondary market, and the advent of specialized CMBS mutual funds, the large and liquid CMBS market is now more accessible.
3. Efficient Diversification
Experienced investors don’t need to be reminded of the value of diversification. The challenge for money managers and for wealthy individuals today is finding ways to enhance diversification while mitigating the risks associated with rising rates.
Mutual funds that specialize in CMBS investing can help investors face this persistent challenge.
Performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than what is stated. Call 1-888-859-5867 for the most current month-end performance. Please click here to view Standardized Performance and Top 10 Holdings.
Investments in mortgage-backed securities, asset-backed securities and other structured finance instruments include additional risks that investors should be aware of, such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. The Fund will concentrate its investments in commercial mortgage-backed securities (“CMBS”) and, therefore, will be subject to the risks associated with these securities, including risks associated with the underlying mortgages, to a greater degree than a fund that does not concentrate in such securities. Investments in non-investment grade and unrated securities present a greater risk of loss to principal and interest than higher-rated securities. Derivatives involve risks different from and, in certain cases, greater than the risks presented by more traditional investments. Investments in non-investment grade and unrated securities, derivatives, and restricted securities tend to involve greater liquidity risk. The Fund is non-diversified and, therefore, may be more susceptible to being adversely affected by a single corporate, economic, political or regulatory occurrence than a diversified fund. Any use of leverage by the Fund may exaggerate the effect of any increase or decrease in the value of securities in the Fund’s portfolio on the Fund’s Net Asset Value and, therefore, may increase the volatility of the Fund. For more information on these risks and other risks of the Fund, please see the Prospectus.
Duration is a measure of the sensitivity to the price of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.
Credit ratings are published by credit rating agencies - S&P, Moody’s - and used by investment professionals to assess the likelihood the debt will be repaid. The ratings are generally expressed as a scale from AAA to D, where higher-rated bonds are in the A’s an lower-rated in the C’s. Any bond rated BBB or higher is considered investment grade debt.
Please consider the Fund’s investment objectives, risks, and charges carefully before investing. This information and other important information about the Fund can be found in the Fund’s current Prospectus, which may be obtained by calling your financial advisor or shareholder services at (888) 859-5867. Please read the Prospectus carefully before investing. Ladder Select Bond Fund is distributed by Ultimus Fund Distributors, LLC.
More information on the Ladder Select Bond Fund (LSBIX) can be found here