A great discussion by Live Newspaper of Mike Nierenberg's strategy.
Part 1: Active Asset Management
This article is the first in a multiple-part series exploring specialized investment strategies utilized by New Residential Investment Corp. This real estate investment trust (REIT) is based in New York and focuses on opportunistic residential real estate i
nvestments such as excess mortgage servicing rights (MSRs) and non-Agency residential mortgage-backed securities (RMBS).
Active asset management and passive asset management are two extremes when describing portfolio management styles. New Residential is a stellar illustration of a company that actively manages investments — especially as applied to residential mortgage assets. Because active management styles and strategies are often misunderstood by investors, this article provides an overview of the primary challenges and effective resolutions for active asset management as applied by New Residential.
Active Asset Management: Problems and Solutions
Here are three of the most serious challenges often faced by active asset managers:
Requirements for Constant Portfolio Monitoring — Active asset management is not an easy lifestyle for the portfolio manager. While passive investment styles involving assets like index funds entail virtually no portfolio management whatsoever after investments are purchased, actively managed assets require an ongoing commitment on a daily and hourly basis. In a rapidly changing political and financial environment, both small and large fluctuations in market conditions are commonplace. The built-in intensity of active management might explain the preference of some portfolio managers to avoid this challenge by simply choosing to pursue a more passive asset management strategy.
Misunderstandings by Investors — An active investment manager must maintain a delicate balance among a series of complex transactions. However, these complexities can be difficult for even experienced institutional investors to understand at times. For example, with residential real estate financing vehicles such as excess MSRs and under-performing portfolios of RMBS, detailed analysis and execution of transactions need to be deftly coordinated. An active portfolio manager is simultaneously engaged in multiple time-consuming tasks such as analyzing, selling, buying, managing and refinancing. But regardless of success, it is not unusual for investors to be confused by an active asset management process.
Maintaining Larger Cash Positions — Large cash balances can reduce earnings from cash holdings and lower overall investment returns. On the one hand, active portfolio managers must be prepared to take advantage of unexpected buying opportunities. On the other hand, a “fully invested” portfolio would inhibit the ability to do this, so most actively managed portfolios maintain ample cash positions that facilitate the capability to make purchases with a quick turnaround time. For example, when institutional investors are forced to suddenly sell because they must quickly increase capital reserves, an active asset management style will enable a portfolio manager to buy if the selling price is temporarily depressed due to the forced sale circumstances.
Multiple Active Management Solutions — New Residential Investment Corp. has successfully overcome active asset management challenges like those noted above by implementing multiple strategic solutions. The company has assembled a specialized and seasoned team that is adept at handling the demanding day-to-day responsibilities of actively managing a diversified portfolio of residential real estate investments. New Residential portfolio managers have focused on unique and hard-to-replicate assets such as mortgage servicing rights — excess MSRs additionally provide the advantage of increasing in value when interest rates go up. The company is well-positioned to benefit from mortgage servicing rights opportunities by successfully meeting qualifications for MSR acquisitions throughout the United States. To facilitate investment opportunities in the mortgage origination and servicing areas, the company’s subsidiaries now include ownership in both businesses. New Residential has also emphasized undervalued RMBS assets such as specific non-Agency portfolios and associated call rights.
One strategy employed by New Residential to reduce the need for large cash positions is twofold: (1) to finance some asset purchases with the participation of co-investors; and (2) to issue new asset-backed notes. It should be emphasized that these solutions would not realistically be available to all investors as they require strong existing business relationships and a solid capital structure to facilitate issuing new securities.
The Bottom Line: Active asset management is time-consuming and requires a specialized mindset — portfolio managers who are comfortable with constant change and the need to overcome difficult challenges. It is increasingly common to encounter new asset choices and unexpected circumstances in today’s dynamic investment environment. For example, during the past 10 years the mortgage servicing business has changed in ways that has surprised many experienced investors.
A reminder — This series will continue with “Part 2: Recent Acquisitions.”
New Residential Investment Corp. operates as a qualified REIT and is publicly traded on the New York Stock Exchange. Subsidiaries include Shellpoint Mortgage Servicing (integrated mortgage platform) and NewRez (mortgage origination).