Brad Milavsky, CAIA, Director of Business Development for Diamond Hill, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss the benefits of investing in securities not tracked by popular fixed-income benchmarks.
Milavsky notes that it is a great time to be a fixed-income investor, as real rates are positive. Diamond Hill specializes in securitized credit, which offers unique advantages of diversification, yield enhancement, and credit protection. Milavsky believes that credit spreads are more attractive in securitized credit than in high-yield or investment-grade corporate bonds. Investors worldwide allocate to the highly efficient US Treasury and investment-grade corporate bond markets, while most securitized products are not included in global portfolios and broad bond market benchmarks.
Milavsky discusses a dislocation in the $1.5 trillion asset-backed securities (ABS) market, where only auto loans and credit cards are included in fixed-income benchmarks. Non-benchmark sectors include aircraft leasing, cell tower leasing, solar, and clean energy. Many fixed-income managers manage large portfolios, leading them to avoid these relatively small markets. In contrast, Diamond Hill is a boutique manager with strong experience and great relationships with issuers, which give it access to new issues in these sectors. The firm performs fundamental credit analysis on structured products, including ABS and agency and non-agency mortgage-backed securities. The strategy earns monthly income, which can be reinvested as interest rates change, which is beneficial in a rising-rate market.
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