In Part 2 (of 2) of this Ladder Insights Series, we continue to discuss additional reasons why CMBS can be an "all-weather" asset class.
4. Reduced Correlation with Corporate Unsecured Bonds
CMBS is a good compliment to a traditional corporate unsecured fixed income portfolio. CMBS is secured by underlying income-producing commercial real estate income properties, and as such trade more independently than traditional fixed income offerings – and benefit from having hard collateral.
5. Geographic and Industry-Specific Diversification
Each CMBS bond can be comprised of several dozen (or more) individual mortgages, which are “pooled” together into single-purpose trusts that insure the bonds. The result of this commingling is that CMBS can offer regional, asset-type, and industry diversification. CMBS issues typically include apartment buildings, office space, medical facilities, industrial warehouses, and/or shopping centers, all in various locations around the country. Therefore, an economic slowdown specific to one area of the country should have less impact on a CMBS bond, which may also be invested across the rest of the country.
The same principle applies to business sectors. While one property use may be under pressure, others may be thriving, and the diversity of collateral in CMBS is a source of strength.
6. A Yield Advantage
CMBS Funds are one way for money mangers to broaden their investment base without taking on unjustifiable risk. It is also worth noting that this improvement in risk profile is achieved without sacrificing yield. In fact, CMBS investments tend to offer a significant yield advantage over government bonds and similarly rated secured corporate issues.
Some of the enhanced yield is a function of the additional security that comes with holding liens against hard assets; it’s a simple expression of a more advantageous risk reward ratio.
7. Shorter Duration
A typical commercial mortgage will have a term of 5-10 years. Unlike residential mortgages, commercial mortgages are usually protected from pre-payment risk with significant lockout periods and defensive requirements that protect CMBS holders against premature payoffs.
A CMBS buyer can elect to buy more senior tranches of bonds that have shorter maturities and benefit from being in a senior position secured by available cash flow from the underlying properties, including individual mortgage repayments.
Also, underwriters often protect themselves from pre-payment risk by requiring “defeasance” (a highly complex but effective form of an interest guarantee) in the event of a premature pay-off. Unlike CMBS, corporate and U.S. Government bonds are generally issued with much longer terms, often up-to 30 years, and do not carry defeasance clauses.
Shorter duration, as sophisticated bond investors know, means less sensitivity to changes in interest rates. CMBS investors may also elect to buy floating rate bonds, which can help hedge exposure to potential rises in interest rates.
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