Brexit: What it Means for the U.S. & Structured Credit Markets

In a surprise to global markets, the citizens of the United Kingdom (“UK”) voted to leave the European Union (“EU”). The results of the referendum were 51.9% to 48.1% in favor of leaving the EU. The outcome of this vote has led to significant volatility with the pound reaching levels against the dollar not seen since 1985 and the STOXX Europe 600 Index falling 7.0%, its worst single day performance since 2008.

Closer to home, perceived safe haven assets such as 10 year US treasuries and gold, rallied 1.7% and 4.7% respectively while risk assets including the S&P 500 Index and High Yield,** have sold off 3.6% and 1.5%, respectively, on the open.

WHAT DOES THIS MEAN FOR STRUCTURED CREDIT MARKETS?

  1. Structured credit markets have lagged the rally in equities and high yield that we have experienced in the last four months. We believe the core of the Multi-Strategy Income Fund’s (ANGIX) portfolio in residential credit continues to be supported by sound fundamentals and anticipate limited volatility in this area. CLOs and CMBS may experience further widening. This would be a familiar pattern that we have grown accustomed to during similar periods of volatility and should bode well for our performance given the emphasis on residential credit.
  2. There is a better tone in the structured credit markets today than there was in January and February as investors are looking to buy the dip and dealers are willing to provide liquidity. Currently, there is very little selling in the markets as buyers have identified the relative value in the structured credit market and are looking to put money to work if spreads widen. While we are on the lookout for opportunities to add exposure at attractive prices, particularly in residential credit, we do not anticipate forced selling.
  3. The Brexit will more than likely put the Fed on hold for the foreseeable future. This could potentially be a benefit for structured credit and other risk assets as the hunt for yield will resume when the volatility subsides from this event.
  4. We do not see Brexit as having an impact on the US residential real estate market or the labor market. Longer term consequences of the Brexit, particularly for the European Central Bank are more bleak.

In summary, while this move might cause some short term volatility in the structured credit markets, we view this move as temporary and having minimal impact to the underlying fundamentals for our strategies. We have worked diligently to position our strategies to withstand additional bouts of anticipated volatility. We have been steadfast in focusing on higher quality structured credit bonds, higher in the capital structure. Therefore, if spreads were to widen, we are well positioned to opportunistically look to invest.

Since the inception of our firm, we have navigated challenging markets and the volatility around Brexit is no exception. We will continue to provide commentary and updates as market developments transpire and please don’t hesitate to reach out to the team with any questions.

**Barclays U.S. Corporate High Yield Index

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ABOUT ANGEL OAK CAPITAL ADVISORS

Angel Oak Capital Advisors is an investment management firm focused on providing compelling fixed-income investment solutions for its clients. Backed by a value-driven approach, Angel Oak Capital seeks to deliver attractive risk-adjusted returns through a combination of stable current income and price appreciation. Our experienced investment team seeks the best opportunities in fixed-income with a specialization in mortgage-backed securities and other areas of structured credit. As of 5/31/16, Angel Oak Capital has over $5.5 billion in assets under management through a combination of mutual funds, private funds, and separately managed accounts.

 


The fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The statutory prospectus and summary prospectus contain this and other important information about the investment company, and may be obtained by calling 855-751-4324 or visiting www.angeloakcapital.com. Read them carefully before investing.

All current and future holdings are subject to risk.

Definitions:
Barclays U.S. Corporate High Yield Index: Measures the U.S. corporate market of non-investment grade, fixed-rate corporate bonds.
STOXX:
An index derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

S&P 500: An American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
CLOs: Collateralized loan obligations.
CMBS: Commercial Mortgage Backed Securities.

Mutual fund investing involves risk. Principal loss is possible. Investments in debt securities typically decrease when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in asset-backed and mortgage-backed securities include additional risks that investors should be aware of, including credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. Derivatives involve risks different from and, in certain cases, greater than the risks presented by more traditional investments. Derivatives may involve certain costs and risks such as illiquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could result in losing more than the amount invested. The Fund may make short sales of securities, which involves the risk that losses may exceed the original amount invested.

It is not possible to invest directly in an index.