Dupont Capital believes there is a short-term value play in vintage commercial mortgage-backed securities that have a strong concentration of well-performing retail properties.
The firm put the strategy into place at the start of the covid-19 pandemic, when portfolio manager Karlis Ulmanis observed many CMBS investors exiting the sector due to concerns about retail- and office-focused securities. Ulmanis, however, was prepared for an eventual market dislocation and rolled up his sleeves.
“When the market starts to seize up, when there is a lack of liquidity and investors are fleeing, I keep dry powder that I can use at those times,” Ulmanis says.
Ulmanis, who followed a similar strategy during the global financial crisis, has been an active buyer of what he believes are undervalued CMBS with coupons that are high enough to offset the potential risks that the underlying properties face. Ultimately, Ulmanis found a niche in 2011 to 2014 vintage bonds with coupons of 4 to 6 percent and what he saw as low near-term default risks.
Short term opportunity
“If you look at the loans themselves and see how they’ve been doing – they have been performing. I am still negative on retail long term, but I’m positive on retail short term,” he says.
Ulmanis doesn’t see this opportunity lasting forever, noting that he expects that the dynamics of the market will shift as the US emerges from the pandemic. He has a strategy for that time as well.
“I will hug the benchmark until there’s dislocation,” he says.