Email of the day
Comment of the Day

May 29 2012

Commentary by Eoin Treacy

Email of the day

on high yield opportunities:
“This is a US class of investments your clients need to know about.

“Agency Mortgage REITs  are a class of US financial companies that have yields between 11 and 17 percent with very low (and often predictable) volatility. They are largely unknown outside the US but are a safe haven in these bearish times. Here is how the most important ones performed recently:

“Here is one article that explains the basics of AMREITs:

“I have attached one report (among very many) on the best AMREIT: AGNC.

“If you need further information, please contact me. I have a major share of my portfolio invested in this sector, which produces around 13-15 per cent p.a.”

Eoin Treacy's view Thank you for this educative email contributed in the spirit of Empowerment Through Knowledge and for bringing this asset class to the attention of the Collective. Double digit yields are not to be sniffed at particularly when credit risk is hedged. However as with any such high pay-out it is important to be cognisant of the associated risks. From my understanding of the asset class, the primary risk Is interest rate related due to the leverage taken on by the trust. An additional concern is the potential for quicker prepayments on the mortgage bonds the trust invests in.

American Capital Agency Corp has a P/e of 5.02 and yields 16.93%. It hit a peak near $30 in late 2009 and ranged mostly below that level until earlier this year. It has held the breakout to new high ground over the last couple of weeks and a sustained move below $30 would now be required to begin to question medium-term scope for additional upside.

CYS Investments has a similar pattern but has not yet broken upwards to new highs. It has a P/E of 3.76 and yields 15.58%. It also invests in instruments where US government agencies hedge credit risk.

Here are the results of a Chart Library Performance Filter for 15 related instruments including the respective yields.

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