Fund Outperforms MBS, Buoyed by Housing

IRVINE, CA—The Vertical Capital Income Fund reports that it continued to outperform its benchmark during the second quarter, with a return of 2.46%, compared with a 2.41% return for the Barclays US Mortgage-Backed Securities Index. With the fund's maximum 4.5% sales charge, the return for the quarter was -2.18%.

Vertical Capital Markets Group created and manages the fund, which has returned 5.68% year-to-date (.89% minus the maximum sales charge) with an approximate $0.27 dividend, compared with a return of 4.03% for the MBS index. For the one-year period ending June 30, the fund produced a return of 6.79% (1.95% after the maximum sales charge), compared with a return of 4.66% for the benchmark MBS Index. Since its inception, the fund has produced a return of 8.78%, or 6.8% with the sales load, compared with a return of 2.05% for the MBS Index. Its SEC annual yield was 4.28% as of June 30.

According to Bayard Closser president of VCMG, the fund benefitted from lower interest-rate sensitivity than the benchmark. Performance also benefited from interest income.

In addition, the fund's assets under management, which more than tripled last year, grew 22% during the quarter and totaled approximately $89.1 million as of June 30, up from approximately $73 million on March 31, the firm reports. The fund currently owns 590 mortgages and expects to make additional purchases that could sustain and potentially enhance distributions in the future.

Also, the fund potentially benefits from a low correlation to both equities and fixed-income securities, which have reached historically high levels of valuation together. This indicates a need for greater diversification with securities that have low correlation to both stocks and bonds, says Closser.

The fund is also affected by the housing market, which Vertical's EVP John Harline says is likely to “wobble, but remain stable” in the coming months. “The housing market slowed, as expected, during the second quarter, due to interest rates rising in 2013, coupled with the new regulatory changes to an already difficult credit market. In addition, a high number of would-be buyers, frustrated by the restrictive credit process, will continue to be forced into the rental market.”

Harline adds that the health of the housing market will also be affected by the Federal Open Market Committee's continued “tapering” of asset purchases, which so far have been reduced from $75 billion a month to $35 billion. However, he says, the FOMC also said it expects rates to stay low even after bond buying concludes. In spite of increasing inflation, interest rates will likely remain low because of continued weakness in job creation and wages.

“Stimulus has been helping support historically low interest rates and increased home-buying activity, possibly lowering risk, because increases in home values should increase the value of collateral behind the mortgage notes,” says Harline. If the increase in collateral values translates to a reduction of risk, it may result in an increase in the value of the notes.

As GlobeSt.com reported in April, the fund also outperformed its benchmark during the first quarter of this year, bringing a return of 3.14% as compared with a 1.58% return for the Barclays US Mortgage-Backed Securities Index. In addition, the fund declared a dividend of nearly $0.13 during the quarter.