10/1/2014 MoneyShow.com: THE DAILY GURU - Angel Oak: Income with Rate Protection

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Angel Oak: Income with Rate ProtectionPublished: 04/14/2014 12:10 pm EST

By: Brad FriedlanderMORE ON: FUNDS

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Brad Friedlander’s Angel Oak Multi-Strategy Income Fund has outperformed its bondmarket benchmark by focusing on non-agency mortgage-backed securities and floatingrate positions; here, he explains his goals of preserving capital and generating solidreturns.

Steve Halpern: Joining us today is Brad Friedlander, founder of Angel Oak Capital andhead portfolio manager of the Angel Oak Multi-Strategy Income Fund (US:ANGLX). Howare you doing today, Brad?

Brad Friedlander: Doing great, Steve. Great to be here.

Steve Halpern: Angel Oak Multi-Strategy ranked in the top 1% of its category in 2012,and last year it returned nearly 4%, while the Barclay’s Aggregate Bond Index lostmoney. What do you credit the strong outperformance to?

Brad Friedlander: I think it’s our focus on, really, the most undervalued assets that wecan muster in the fixed-income world and the bond world.

We tend to focus on more credit-related investments, namely, the non-agency mortgage-backed securities market that was once viewed as toxic and, gradually, the investorcommunity is warming up to the idea that there is potential value in those types ofassets.

We still believe that they’re significantly undervalued across most of the areas of thestructured credit markets, and so, we still believe that there’s value there. At the sametime, we tend to focus, up in quality, on the higher quality aspects of the structuredcredit universe, and with that, preservation of principal is still one of our key tenants.

Steve Halpern: As background, what’s your current outlook for the overall economy andwhat do you expect from the Federal Reserve as the year progresses?

10/1/2014 MoneyShow.com: THE DAILY GURU - Angel Oak: Income with Rate Protection

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Brad Friedlander: We’re still climbing out of the winter doldrums. The market spent thefirst quarter really reacting to a lot of the geopolitical risks.

If you remember, the threat of a currency crisis in the earlier part of the year, and a lot ofsofter economic data that was really tied to weather, and I think we’ve begun to reverseout of that some. We’ll continue to watch and monitor some of the labor market relateddata that’s coming out as far as jobs are concerned.

That should be more beneficial, especially if you look this week, we had some figures onjobless claims again coming down a bit.

We’ll be watching growth figures as well. I think there’s still the potential for theeconomy this year to flirt with near 3% growth, but again, it’s still going to be a verygradual recovery that we’re seeing now. The Fed is keeping a watchful eye as well andthey are near robotic in nature, I think, and just not overreacting to any one data point.

They are looking at the series and anyone trying to overly read into any sort of bias onthe part of the Fed or any sort of sudden changes, I think, have been proven wrong overthe course of the last six to 12 months.

Steve Halpern: You’ve cautioned that there are longer term risks to those who hold USTreasuries, and you note that the environment has bailed out the bond market in ourrecent times and you see this momentum reversing. Could you expand on that?

Brad Friedlander: I think interest rates—the ten-year—at this point, is roughly 2.6%.That’s a good 40, 50 basis points below where we were in the beginning of this year.This is falling largely into our forecast for the first and second quarter, so we may have afew more weeks or months of generally lower rates.

At some point here, we do expect the weight of better economic data potentially as well,some more confidence in the broader markets, removing some of the uncertainty andsome of the geopolitical risks that are still out there. We would expect that trend toreverse.

We’re at a point now where, with Treasury sitting at such a low rate, and much of thetraditional bond market sectors and subsectors at such low rates now at this point, oneneeds to look at the risk/reward, I think, of both and that relationship there.

Just a 40 or 50 basis point move higher in interest rates back to where we were in thebeginning of the year could result in a 3% or 4% drop in valuation for many of thosetraditional type of fixed income products. It’s something that we are wary of.

Tickers Mentioned: Tickers: ANGLX

10/1/2014 MoneyShow.com: THE DAILY GURU - Angel Oak: Income with Rate Protection

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