Strong Inflows Boost BNP Paribas Mortgage Fund As Hunt For Yield Continues

The BNP Paribas Flexi I US Mortgage Fund (‘the Fund’) has enjoyed strong inflows of more than USD450 million since the start of the year[1] as investors searching for higher yields in today’s low interest rate environment continue to diversify into the US agency mortgage-backed security (‘MBS’) market.

The size of the Fund has reached more than USD650 million[2], helped by demand from European and Asian investors who have been attracted by the high yields, low credit risk and strong historical returns of the Fund across interest rate and economic environments.  The fund invests predominantly in agency MBS, a highly liquid asset class that carries minimal credit risk.  Agency MBS are backed by pools of residential mortgages and are guaranteed by the US Treasury.  They offer investors the benefits of yield, capital preservation and diversification.

At more than USD5 trillion[3], the US agency MBS market is the world’s second-largest bond market behind US Treasuries, making it one of the most liquid markets in the world.  All agency MBS are guaranteed by US government agencies and therefore have the same AAA credit rating as US Treasury securities – no agency MBS has ever defaulted.  The market’s unique characteristics give it the potential to perform in an environment of slowly rising interest rates, while with a duration of 2.5[4] years it can provide positive total returns even in falling rate environments.  Even in risk-off scenarios, agency MBS spreads typically outperform investment grade credit and other riskier sectors.

The Fund looks to maximise total return while maintaining capital stability and outperforming the Barclays US MBS Index.  The Fund focuses on investments in the agency MBS sector and may have an allocation of up to 30% in other US structured securities with a minimum credit rating of BBB, US Treasuries, and cash.  With a low correlation to traditional fixed income assets, the asset class offers portfolio diversification.  For example, the Fund has a 10 year correlation to European fixed income of just 0.21[5].

John Carey, CFA, Head of Structured Securities at BNP Paribas Investment Partners and Lead Portfolio Manager for BNP Paribas Flexi I US Mortgage Fund, comments:

“The low, and in some cases negative, yields that are available in many developed fixed income markets globally have led to increased demand for US agency MBS.  In particular there is strong interest from international investors looking for enhanced yield, who are attracted by the high credit quality of the asset class and its low correlation with traditional global and European markets.  In an environment in which interest rates are widely expected to stay lower for longer, we believe that the BNP Paribas Flexi I US Mortgage Fund should continue to offer European investors an opportunity to generate higher risk-adjusted returns compared to other high quality investments.”