Asset Allocation for Practitioners

Asset Allocation for Practitioners STRATEGOS DEEP VALUE COMPOSITE FUND Anastasia KOTOVA • ar• Iint t -ell !MPS.' ISOM wrilfl QC's Yeller IIIIMPIMI a. t t t ) • ,.. ... lal•Prt al. laii , arai RISE. n NY Ala I. • ;. Y lama 41.101.11 ..t I h l In MI ' ; itt' • , .fir , 1....‘ i ._ ... . 1 . .1 ' EFTA01121792 CONTENTS 1. FUND SUMMARY 2. PORTFOLIO HOLDING & MANAGEMENT 3. TO INVEST OR NOT TO INVEST? 4. CIRCUMSTANCIAL ADVANTAGES 5. FUND STRENGTHS 6. FUND RED FLAGS 7. SELL-IFs 8. CONCLUSION EFTA01121793 I ..:, 1.i I .,.. ii up, il, fill I H::: Oh C. : I::: . ::: ,: 11::::. :: : :: " ; Vi I .: I :; :ii " i IL, , i I il .. i ll il ' H A !Ph I n4..4 11111 .. i., . ;1 II !!IIIII livi ', li II-- !I , ...„:r. iiIII1 ihil FUND SUMMARY Based: Philadelphia, Pennsylvania, USA Domicile: Ireland AUM: $449M Sector Focus: Non- Agency RMBS, Subprime, HELOC, TRUPS CDO, Non- Agency IO Wholly owned subsidiary of Institutional Financial Markets Inc (IFMI) until March 28, 2011 Same Portfolio Manager managing Funds & SMAs in Composite Strategy: Bottom-Up, Fundamental Analysis, Seasoned products, lower LTVs EFTA01121794 PORTFOLIO HOLDING & MANAGEMENT i ii Portfolio & Risk Managers I Sector Breakdown SDVF Alex Ci•olle David Gre•or Barry Dennis EFTA01121795 TO INVEST OR NOT TO INVEST? One of the best performing asset classes Uniquely Supportive Technicals YES! Specific Geographical Location of securities k. Investing in the middle of the Capital Structure Longer Payment History & Low LTVs EFTA01121796 CIRCUMSTANCIAL ADVANTAGES • Increasing Interest Rate Environment • Improving Housing Market • Sound Macroeconomic & Market Fundamentals • Understanding of the Mortgage Market 4 Adequate compensation for bearing risk EFTA01121797 FRED 15.0 (Months' Supply) 12.5 10.0 7.5 5.0 2.5 — Monthly Supply of Houses in the United States di ) 2002 2004 2006 2008 2010 2012 2014 2016 Source: US. Bureau of the Census research.stlouisfed.org myf.red/g/4pWC Source: FRED EFTA01121798 FUND STRENGTHS Skin In The Game - 9% Not entered the Re-REMICs Structure Risk Diversifier and Return Enhancers SDV FUND Attention to changes in Industry — Identify Relative Opportunity 4ir Benefitting from Stronger $ and low energy prices Not involved in Credit Risk Transfer Deals EFTA01121799 FUND RED FLAGS • Structural & Public Policy Risks • No mechanism to factor in the 2nd liens to have a better picture of the Combined LTV (CLTV) • Fund managed by same guys who built the first structures of the CDOs. SubPrimes were first to go bust in GFC 4 re-packaging the product • Industry is at $650B, unlike 2008 when it reached peak at $2.1 Trillion 3 Industry reducing @ 10-15% per annum • Do not designate the exact ratings of their holdings 3 93% of bonds originally rated AAA (2008) are now rated below investment grade EFTA01121800 SDVF v/s Markit iBoxx US Non-Agency RMBS TRIndex STDVMBS ID $ NAV 2891.89 31 Mar STDVMBS IC 05/31/2011 1D 3D 1M 6M YTD lY SY Max Daily ♦ Lf Table << Cf. Security/Study PIN Event Source: Bloomberg EFTA01121801 SELLS-IFs • : .1 I . .• ..„: I ;.. II II. I. kali, . ... . . .. . ... , HT. :, ! ., i :Jr. :. Is sr :.* :: :: I:: :: :I: ::: it al :. ii ll; :I ii : in i l I I I.. II '41l ll I i II Illi 'II !I Ii; ;I . in i s lip' il :I 'II s is .. oi ii Hi': il if . :4. , ;I: .. 1 Ili! rli 7,- ii : HP' i Key members -)Alex & David n Major external shocks i Fundamental changes if 7) macroeconomic indicators Policy changes of the Fund EFTA01121802 CONCLUSION Cash Distribution Model Flows 4Source of Risk & Opportunity While difficult to directly stress test bonds under policy scenarios 4 add potential interest rate increases when modeling. We model cash follows under a variety of assumptions accounting for different assumed prepayment, default, and loss severity rates. Mortgage servicers are key players in the MBS sphere 4 Collect payments from borrowers and can advance on delinquent loans 4 Relationship with agents is key. Monthly reporting is provided by their 3rd party administrator. Provides a technical stratification of the portfolio and other relevant statistics on the underlying bonds. Illiquidity in the portfolio is managed via Cash Flows generated Opportunities 4 Hedging & Leveraging if market does not expand + Re-REMICs + entering seasoned post 2006 securities EFTA01121803 THANK YOU EFTA01121804