Perspective

Market Review:

The third quarter provided a rather emphatic confirmation that the 40-year bond bull market is over, as the 10-year US Treasury rate reached heights not seen since 2007, prior to the Great Financial Crisis (GFC) that launched an epoch of zero-interest rate policies (ZIRP) across the globe. The 10-year rate spiked sharply by almost 80bp in Q3 to 4.60%, as the Fed’s “Higher for Longer” message began to sink in with bond market investors. The Fed lifted its benchmark rate in July to 5.25% and left it unchanged in September, but sent a clear hawkish message to the market in its September Summary of Economic Projections (SEP) statement, where the median fed funds rate was projected to reach 5.6% by the end of 2023 and only drop to 5.1% by the end of 2024. The main impediment to the Fed’s goal of a 2% target inflation rate remains a stubbornly tight employment market, with a 3.7% unemployment rate, 9.6 million job openings and 0.7 unemployed workers per job opening ratio. Based on the Fed’s latest SEP, they project that the unemployment rate will only rise to 3.8% by the end of 2023 and to 4.1% by the end of 2024, with PCE inflation not projected to decline to 2.5% until the end of 2024. Any trace of an imminent Fed pivot to cut rates, which dominated investors’ conversations during the first half of the year, were squashed in Q3, with the Fed now projecting for rate cuts to not occur until Q4 2024. Long term rates felt upward pressure due to the record supply of Treasury issuance amidst an 8.5% budget deficit as of Q2, as the Federal government ratcheted up its non-defense spending. Furthermore, due to the Bank of Japan’s decision to not cap JGB yields, ten-year JGB yields soared to 0.78%, which made US Treasuries relatively less attractive to Japanese investors, the largest foreign holder. Q3 saw 58bp of bear steepening with the 2-year rate increasing by 15bp while the 10-year climbed by 73bp, which was consistent with our projection from our Q2 letter.

Despite a more than 500bp rise in the short-end of the curve and a 300bp rise in the long-end since the rate hikes began in early 2022, the economy continues to show resiliency with the consumer leading the way. Following 2.1% year-over-year (y/y) growth in Q2 GDP, Q3 GDP is projected to grow by 2.5% according to the NY Fed model.  Meanwhile, the US economy has added a remarkable 266k jobs on a three-month average basis, which suggests parallels to the late 1990s economic goldilocks environment, causing many to believe the Fed may be able to successfully engineer a reduction in the core inflationary rate combined with only a mild decline in economic growth (i.e. a “soft landing”). A strong run by US equities this year is lending credence to the soft-landing scenario. In Q3, the S&P 500 cooled off and posted a -3.27% return.  The Nasdaq 100 dropped -2.86% in Q3 while the Russell 2000 index, which is more sensitive to long term interest rates, declined -5.13%.

However, not all economic metrics have been rosy and there are clouds gathering on the horizon that cast major doubts on the “soft landing” scenario. Both the Bureau of Labor Statistics (BLS) and Atlanta Fed data suggest that wage gains peaked in the middle of 2022, and while still above pre-Covid trends, hourly wage gains are clearly on a declining trajectory. The excess savings accumulated from Covid-related stimulus has been exhausted for the bottom quartile of income earners. While disposable personal income is still above pre-Covid trends, it has recently stalled on a month-to-month basis. Real incomes (inflation adjusted) are now below pre-Covid trends and have recently declined month-over-month (m/m).

At the same time, the Senior Loan Officer Opinion Survey suggests that banks have tightened lending standards across all consumer debt products and demand for auto loans and credit cards has substantially declined throughout 2023. Declining income growth combined with a rising savings rate will put pressure on consumption, which will negatively impact corporate earnings. This is happening at the same time that corporate debt as a percentage of revenues has increased to around 95%, which is very high in the context of the last 60 years. While most corporations took advantage of record low rates and refinanced their debt in 2020-2021, the weighted average maturity of junk-rated debt is only five years, so approximately half of those firms will have to refinance their debt again shortly. Hence, rising interest expenses will put significant pressure on the weaker corporate balance sheets and could potentially trigger a vicious default cycle. This has yet to be reflected in corporate credit performance however, as in Q3, both Investment Grade (IG) Corporate and High Yield (HY) Corporate indices outperformed Treasuries with excess returns of 0.84% and 1.02%, respectively. The Bloomberg IG Corporate index had a negative total return of -3.09% due to its long duration, while the Bloomberg HY Corporate index managed to eke out a positive total return of 0.46%. The Bloomberg Aggregate index produced a -3.23% return in Q3. High Yield spreads ended the quarter relatively unchanged at 394bp although the US High Yield TTM default rate rose to 2.6% by volume in Q3 and is projected to reach 4.5% by the end of the year, according to Fitch.

RMBS:

The RMBS sector proved once again to be a refuge for Structured Credit investors looking to pick up yield while not taking much credit risk. The limited credit risk was driven by a continuation of home price appreciation after the housing sector cooled down at the end of 2022. While it seemed natural for nationwide home prices to decline by 5-10% from June 2022 to January 2023 following a torrid ascent of housing prices during the pandemic and a doubling in mortgage rates, the subsequent 6% rise in prices from January to July 2023 took many by surprise. While housing affordability has reached an all-time low from the inception of the series tracking it in 1986, the supply-demand dynamic in residential real estate continues to support recent home price gains. The demand is driven by the demographic composition, where millennials and Gen Z, the largest population cohorts, are coming of age and want to move into homes to support their new families. The Covid pandemic only accelerated this household formation. On the supply end of the spectrum, the supply of dwelling units has not kept pace with the demand since 2009, when home builders pared back construction activities due to losses from GFC and the ensuing systemic lack of funding. According to Morgan Stanley research, the supply shortage, assuming housing starts of 1.3 million per year, equates to over 3 years of gross housing supply. When accounting for obsolescence estimates, the supply shortage expands to 5 years’ worth of building. Following the spike of mortgage rates from 3% to close to 8% by the end of Q3, the decoupling between the effective mortgage rate of the outstanding mortgage universe and the prevailing current mortgage rate has never been greater in history (3.75% vs 7.5%). Close to 99% of mortgagors lack an incentive to refinance at current interest rates. This difference has resulted in the “lock-in effect” where homeowners with low effective rates are unwilling to sell their properties because their monthly payment on the new property will significantly increase. This lock-in effect caused the inventory of existing homes to approach all-time lows at below 1MM units for sale.

RMBS Non-Agency spreads tightened across most sub-sectors, overcoming about $6 billion in redemptions that hit Structured Credit mutual funds late in Q3.  Investors were willing to pay a premium for investment grade cashflows as the risk of credit downgrades and write-downs appeared remote against the backdrop of solid fundamentals. Technical factors continued to contribute to spread tightening and decent liquidity for investment grade on-the-run cashflows, as new issue volumes in 2023 are running at just 41% of 2022 numbers.

The Non-QM sector continues to be the leading Non-Agency sector in terms of issuance, with $22.6 billion issued through Q3, 64% of 2022 volume. New issue volumes continue to be well absorbed with spreads tightening in Q3 by 10bp for A1 through A3 pro-rata front-pays and by 50bp for BBB rated subordinate tranches. Higher rates have undoubtedly helped attract money manager demand for these IG tranches. Despite recent spread tightening, Non-QM AAA front-pays remain cheap relative to IG Corporates based on spread ratios. Delinquency rates continue to be muted with delinquency buckets below 2.5%. Bank statement originations continue to have higher delinquencies relative to full docs and investor-asset based originations. We expect delinquencies to pick up over the next 12-24 months as escrow costs composed of taxes and insurance premiums remain on the upswing, with 5-10% annual increases over the last few years. Some states, such as Florida, have seen insurance costs rise by 30%, forcing insurers to hike premiums or drop coverage altogether.

The RPL sector has seen $8 billion in new issuance year-to-date. Spreads on Chase RPL shelves have held steady from Q2 with AAAs trading at 195 bp spread, AAs at 235 bp spread, Single-As at 280 bp and BBBs at 350 bp. Prepayments have been trending in the low single digits. Within the private reverse mortgage space, there was only one deal that priced from Brean, who exercised the collateral call option on a 2007 deal and re-securitized the loans. Both private jumbo deals, RPIT and BABS, and HECM buy-outs deals, CFMT/RBIT/FAHB, traded better during the quarter due to a limited extension profile of these cashflows. Private reverse deals continue to offer significant spread pick-up to investors seeking extra yield.

Legacy RMBS was among the worst performing RMBS sub-sectors as poor liquidity and a lack of meaningful supply continued to weigh on the space. Investment grade cashflows did not see much of a change in spreads amidst lower trading volumes. IG Subprime floaters continue to trade in the 200bp-250bp range, while fixed-rates are clearing in a wider 175-250bp spread range depending on the loan count. Below IG subprime floaters saw spreads widen to 250-300bp range, while Prime/Alt-A passthroughs traded all over, with spreads reaching as high as 350-375bp for senior cashflows of less liquid low loan count backed deals.

Undoubtedly, GSE CRT tranches have been the best performing sector in RMBS in 2023. The floating rate nature of their coupons has been a boon on both the coupon and the duration front. Additionally, strong housing fundamentals have given confidence to investors to add levered exposure to bottom tranches of CAS and STACR deals, with select 2021-2022 STACR B1 & B2 tranches posting an impressive 17% and 32% returns YTD, respectively.  Finally, low overall issuance in the GSE CRT space contributed to a strong technical backdrop as 2023 issuance has been running at just 30% of 2022 supply. For the quarter, CRT M2 and B1 tranches have tightened by 160bp and 190bp, respectively, to finish at 340dm and 435dm. The ratings upgrades and regular tender offer activity by GSEs have contributed to increased optionality of lower rated CRT tranches and have augmented the sponsorship of this RMBS sub-sector. While this RMBS sub-sector has performed well in the current market environment, it tends to be the “canary in the coal mine” at the first hint of perceived credit deterioration, which is certainly what happened in March 2020.

CMBS:

CMBS is the one sector that just cannot seem to catch a break in 2023 and the 73bp sell-off in the 10-year Treasury in Q3 only introduced additional challenges to an already beleaguered market. Conduit AAA LCF were somewhat immune from the rate sell-off as they have a very limited extension risk given their seniority position and do not require a large percentage of loans to refinance at maturity to remain “money good”.  Excluding defeased loans, the refinance rate for loans with a 2023 maturity is around 70% and YTD there was only one 2013 vintage A4 tranche that has not paid, from the MSBAM 2013-C11 deal. On-the-run (OTR) AAA LCF spreads tightened by 5bp as money managers began to reach for duration in a higher rate environment. OTR Conduit BBB- subordinate spreads widened again in Q3 by 50bp to 950bp, as investors continue to shy away from deep credit CMBS structures considering the higher perceived default and maturity extension risks. Senior SASB tranches are trading based on idiosyncratic collateral characteristics with prices on some Senior SASB AAA/AA tranches (yet to be downgraded) falling into the low 70s and below. When it comes to IG Conduit/SASB mezzanine tranches, liquidity has all but evaporated, with only a few regional dealers and aggressive hedge funds willing to make markets. The consensus seems to be that collateral valuations are yet to fully reflect the distressed nature of some sub-markets (office and retail). It is expected that many borrowers will hand back the keys to the lender and that the best outcome would be a maturity extension and some kind of modification. We expect things to get worse before they get better. From a demand perspective, the CMBS IG Mezz market is suffering from an exodus of legacy holders who are looking to pare down their CMBS/Office exposure, while insurance companies are concerned about more punitive risk-based capital treatment from NAIC.  Hence, hedge funds and private debt funds are currently the marginal bidders for CMBS IG Mezzanine paper and bid-offer spreads are quite wide. The tightening of financial conditions and constraints faced by small and medium-sized banks have greatly limited financing options for CRE collateral.

In light of a 3% rise in the long end of the curve since 2021, transaction volumes have fallen off a cliff with a 59% reduction y/y. 2023 CMBS private label issuance has been trailing 2022 volumes by a whopping 69% through Q3. Part of the problem with transaction activity is sellers’ unwillingness to accept lower valuations, concomitant with a rapid ascent of risk-free rates. The dwindling number of sellers manifests itself in a divergence between the interest rates on new CRE loans and cap rates across CRE sectors. While CRE loan rates have adjusted by 3-3.5% over the last year, CRE cap rates have only increased by a percentage point. When looking at distressed CRE sales or appraisals of specially serviced loans in CMBS space, the difference between underwritten and most recent appraisal/sale can be startling: a 93% decline in the value of Crystal Mall, a 77% decline in the value of Louis Jolliet Mall, and a 71% decline in the value of 1740 Broadway office building.

While the above decline in values highlights the idiosyncratic risks of CMBS, the sector as a whole is performing better than would be expected based on negative headlines. According to Trepp, the CMBS delinquency rates were only 4.39% in September (for comparison, during the GFC delinquency rates topped 10% ). In the heavily watched and most beleaguered CRE sector, office, the delinquency rate reached 5.58%. According to Barclays Research the performance at maturity for loans set to mature in Q3 was paradoxically decent despite a rapid rise in rates. When excluding prepayments and term defaults, and only focusing on loans that survived to their maturity, 79% paid off at maturity, which was above Q2’s 68% pay off rate. These numbers represent some upside which might not be captured in the current pricing of A4 and AS conduit tranches. The current market convention is to extend maturities of Conduit and SASB loans that have insufficient debt yields to qualify for refinancing without an equity infusion. The maturity extension scenarios have typically assumed 2 – 3-year extensions, but with the current rate sell-off, more conservative 5-year extensions are starting to become prevalent in relative value analysis. One wild card that could potentially be of benefit to mezzanine investors is loan assumption, which occurs when a buyer of property backing a CMBS deal assumes payments on the seller’s outstanding loan amount. Loan assumptions can improve the credit performance of underwater loans (low DSCR) if the new buyer has deep enough pockets to reposition the asset into a better performing one.

The Small Balance Commercial (SBC) space saw one new issue deal from Velocity in Q3, with AAA through BBB stack coming in at 260, 310, 400 and 500bp spreads respectively. SBC collateral has been performing better relative to larger conduit loans, as in many instances SBC borrowers’ livelihoods are inextricably linked to the properties backing these deals and borrowers would go to a greater extent to ensure they do not lose these properties. Agency CMBS issuance totaled $77.4 billion through Q3, 31% below 2022 volume. OTR Freddie Mac B and C spreads were roughly unchanged in Q3 at 250bp and 300bp respectively.

ABS:

ABS continued to lead the way among Structured Credit sectors in terms of issuance, with $214bn of new issue volume through Q3. The new issue volume is up 4.9% relative to 2022 numbers. The decline in credit cards, student loans and esoteric sectors has been offset by an increase in auto ABS and equipment ABS issuance (up 25% and 12% respectively). Subprime Auto ABS has been a leading ABS sector in terms of liquidity, when using turnover (volume/outstanding) as a proxy, according to JPM, at 44%, while a shrinking sector, such as FFELP Student Loan ABS, has seen the least amount of liquidity at 6% turnover in 2023. Generally, ABS spreads have marginally tightened in Q3 as money managers and insurance companies find ABS to be somewhat of a refuge sector in Structured Credit during times of turbulence and illiquidity.  Subprime Auto AAA spreads saw 10bp of spread tightening to finish the quarter at 90bp, while Subprime Auto BBBs tightened by 25bp to 225bp. Subprime Auto BBs underwent even more tightening as their spreads decreased over 50bp to the low 500s. However, at lower credit ratings investors are particularly cognizant of issuer risk with shelves like ACC, USAUT and FCAT suffering from outsized delinquencies and losses, due to issuer bankruptcies and poor underwriting.  Similar to Subprime Auto, AAA Marketplace Lending (MPL) tranches tightened 15bp to 160bp in Q3, while BBB MPLs tightened 35bp to 340bp.

The credit performance of the Auto and MPL sectors reflects the ongoing struggle of lower credit borrowers trying to overcome persistently high inflation. With the bottom quartile income earners exhausting their excess savings accumulated from the pandemic related fiscal stimulus, the delinquencies on subprime borrowers with FICO scores below 575 have spiked to the highest levels in more than 10 years, according to Morgan Stanley Research. At the same time, credit performance of borrowers with higher credit scores is more in line with Pre-Covid levels. Subprime Auto severities have increased over the last 12 months to the mid-50s after reaching the lowest levels in 2021 due to a rise in used car prices at that time.  Similar bifurcated performance can be observed in MPL where Subprime or lower credit tier borrowers’ default and net loss rates have increased to levels higher than pre-Covid (>20%) while the delinquency rate of higher tier prime borrowers remains slightly below pre-Covid levels at 5%.

CLOs:

CLOs continue to be among the best performing structured credit asset classes with another solid quarter in Q3. The JPM CLOIE index is up 7.7% YTD, while BB CLOs have posted an incredible 18% return through Q3. Like CRT floaters, CLOs are benefiting from the floating nature of their coupons while robust structural protections and resilient economic performance contributed to investor confidence in the leveraged loan market.  CLO spreads tightened during the quarter with the credit curve marginally flattening, AAAs were tighter by 5bp to 165bp, AAs tightened by 20bp to 230bp, Single-As were tighter by 15bp to 285bp, and BBBs tightened by 35bp to 450bp. CLO issuance saw a dispersion between Broadly Syndicated Loans (BSL) and Middle-Market Loans (MM) with BSL issuance declining by $16 billion relative to the prior 5-year average, while MM CLO issuance ballooned to $19 billion, double the historical average. A proliferation of private debt credit funds has contributed to a significant rise in MM CLOs. Favorable supply-demand technicals have pushed the average price of the leveraged loan index up 1.5 points to $95. Limited leveraged loan issuance, combined with a healthy creation of CLOs, drove the prices of leveraged loans higher across the rating spectrum. The leveraged loan index has rallied by 2.7 points YTD, while the share of loans priced below $90 declined from 20% to 10%. Interestingly TruPS CDOs, also a floating rate sector, with limited supply and healthy credit fundamentals, has not seen much spread tightening since the beginning of the year as Silicon Valley Bank shockwaves have not dissipated and liquidity continues to be subpar amidst fund redemptions. AA 2nd and 3rd pay TruPS CDO floaters have been trading around 350dm in Q3.

Structured Notes:

Corporate Structured Notes underperformed corporate bullets in Q3 as a rate sell-off, along with a current lack of carry, pushed prices of CMS spread floaters to lower levels. Low multiple 30CMS -2CMS floaters (4-6x) declined into the mid-50s for 2033-2034 maturities, while high multiple floaters (10-20x) reached the low 60s.  High coupon binary CMS spread floaters (9-10 coupon if spread >0) reached the low 70s.

Q3 2023 Portfolio Attribution and Net Return

SECTOR	ALLOCATION	NET RETURN*	ATTRIBUTION
RMBS	39.60%	0.57%	0.23%
CMBS	25.30%	1.25%	0.32%
ABS	5.60%	2.04%	0.11%
CLO/CDO	4.30%	1.97%	0.08%
CORP	12.70%	-2.59%	-0.33%
GOVT	7.20%	-3.61%	-0.26%
Cash	5.30%	0.37%	0.02%
Total	100%	-	0.17%

Source: Ultimus Fund Solutions, Orange Investment Advisors

*Net performance shown is the Orange Investment Advisers (“the Firm”) Structured Credit composite in USD. Past performance is not indicative of future results.  Changes in exchange rates may have adverse effects. Net performance results reflect the application of the highest incremental rate of the standard investment advisory fee schedule to gross performance results. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. Investment management fees are available upon request. The Firm claims compliance with the GIPS® standards; this information is supplemental to the GIPS® report included in this material. Returns greater than one year are annualized.

Portfolio Attribution and Activity:

The Structured Credit Value composite returned 0.44% gross of fees (0.07% net of fees) for the quarter, while the Bloomberg Aggregate Index declined -3.23%. The third quarter’s significant outperformance is primarily attributed to lower average duration relative to the Bloomberg Aggregate (2.3 yrs vs 6.2 yrs) and its higher average carry (9.1% yield vs 5.1% yield). The main positive contributors were CMBS and RMBS with 0.32% and 0.23% of contribution to the overall portfolio return.

The main detractor was Corporate Structured Notes, with -0.33% contribution to return due to higher interest rates and very low carry, as coupons on most CSNs are zero due to the curve inversion. Additionally, we have added 10-year Treasury notes and futures as rates have been rising to extend the duration to our upper bound target and hedge a risk-off event in the portfolio. These hedges contributed a return of -0.26%.

We were fairly active during the quarter, trading over $44MM in net proceeds, excluding Treasuries and futures. We took advantage of spread tightening in the Non-QM subordinate space and sold a few long duration positions at yields below 7%. Lower dollar IG Non-QM subordinate tranches have seen spread compression into the rate sell-off, as the optionality to faster prepayments and high returns in a rate rally caused the spreads on discount 2021-2022 Non-QM and Prime 2.0 subordinate tranches to tighten inside of new issue on-the-run spreads. We reinvested the proceeds from these Non-QM sales into seasoned investment grade CMBS tranches at mid-teens yields to punitive 3-year maturity extension scenarios.  These CMBS Conduit and SASB investment grade tranches have so much credit support that a quick liquidation of distressed collateral would actually result in even higher yields, due to faster return of principal. We added a liquid, new issue BBB- CMBS Conduit tranche north of a 13% yield despite its stringent underwriting. The deal is backed by newly originated collateral with a net WAC of 6.3%, LTV of 51% and DSCR of 2.04x and hence does not face the same refinancing issues as more seasoned vintages. We also made an opportunistic purchase of an Italian NPL senior tranche at double-digit yields with significant price upside.

Portfolio Outlook:

The economy continues to hum along as if nothing happened, despite the Federal Reserve raising interest rates by 525bp in the last 18 months. However, we believe that due to significant lag effects, the ending of unprecedented fiscal stimulus, and the deleterious effects of a high inflationary environment, we are not likely to escape a recession by early 2024. Both companies and consumers took advantage of record low rates to secure cheap funding in 2020 and 2021. Hence, the brunt of the current interest rate hiking cycle will take longer to feel for both corporations and consumers. The end of the student loan payments moratorium in October will put a further strain on many families’ budget. It is also quite clear that the period of high interest rates is here to stay for a while, at least until something breaks in the financial system. The Fed will not want to make the same mistakes it made in the 1970s when it allowed runaway inflation to reignite after it began to cut interest rates. While we are nearing the end of interest hiking cycle, (there might be another 25bp rate increase by the end of the year), the Fed made it clear that rate cuts are not on the table at least until the end of 2024. The bond market began to take the “Higher for Longer” message seriously with 10-year yields piercing a previous resistance of 4.50% and reaching a peak of 4.88% on October 6th.

9/30/2023

Sector	Allocation	Price	Yield	Eff Dur	Sprd Dur
RMBS	38.70%	$75.99	9.97%	2.24	3.75
CMBS	27.52%	$78.10	11.11%	2.22	3.22
ABS	5.52%	$91.17	8.29%	1.11	2.52
CLO/CDO	4.31%	$75.37	11.59%	0.08	3.22
CORP	12.60%	$64.72	9.12%	5.94	5.09
GOVT	5.44%	$92.68	4.58%	6.96	-
Cash	5.91%	$100.00	4.68%	-	-
Total	100%	$77.44	9.55%	2.67	3.26
Blbg Agg	-	$86.30	5.40%	6.2	6.1

Source: Ultimus Fund Solutions, Orange Investment Advisors

Sector information shown represents the quarterly average allocations and price, of the entire portfolio and should not be considered a recommendation to purchase or sell a particular security. All other information is as of 9/30/2023. There is no assurance that, as of the date of publication, the securities remain in the portfolio; such information is subject to change at any time and may differ, sometimes significantly, from individual client portfolios.

While we have always maintained a short duration for the portfolio (around 2 years at most), we currently have been tactically adding duration toward the upper bound of our target duration range (3 years) at these elevated interest rates. Our preferred instrument is Treasury futures, but we have also added marginal duration via Agency MBS which is trading at multi-decade high spread levels. We like the current production 30-year 6.0 and 6.5 coupons for their extra carry.

After the rapid ascent in risk-free rates in 2023, along with the significant widening of CMBS mezzanine spreads and a marginal widening in Legacy RMBS spreads, our portfolio’s CMBS and RMBS both yield over 10%.  In terms of current positioning, we have been slowly migrating from RMBS to investment grade CMBS tranches, primarily Conduit AS/B tranches and SASB seniors. While we do not expect spreads to firm up across CMBS sectors in the near term due to technical and fundamental credit headwinds, we do like adding solid investment grade CMBS cashflows at double digit yields to conservative modification scenarios. There undoubtedly will be a lot of pain for CRE investors but in many instances the current market valuations are already discounting most of this pain.  We believe that we are well equipped to take advantage of these unprecedented opportunities in the CMBS market through our thorough security selection and risk mitigation processes. We continue to like small balance commercial mezzanine tranches as small balance collateral should outperform conduits from a credit standpoint but widened in sympathy with them. Within RMBS, we continue to find opportunities in the Legacy space at high single digit and low double-digit yields. We also like esoteric sectors such private reverse mortgages and HELOCs.

GIPS® Report

Orange Investment Advisors Structured Credit Value Strategy Composite

Composite Inception Date: September 1, 2018
Composite Creation Date: July 2018

Year End	Composite Performance				Annualized 3-Year Standard Deviation			Total Assets
	Gross	Actual Net	Model Net	Benchmark	Composite	Benchmark	Internal Dispersion	Firm	Composite	Number of Accounts
2022	-4.85%	-6.27%	-5.47%	-13.01%	5.88%	5.85%	N/A	526.47	327.74	1
2021	6.36%	4.79%	5.67%	-1.54%	5.37%	3.40%	N/A	422.64	294.19	1
2020	15.74%	14.05%	15.00%	7.51%	N/A	N/A	N/A	277.48	193.05	1
2019	8.92%	7.31%	8.21%	8.72%	N/A	N/A	N/A	39.74	39.74	1
2018	1.96%	1.46%	1.74%	0.98%	N/A	N/A	N/A	35.76	35.76	1

Firm Definition

Orange Investment Advisors is a Fixed income investment manager that invests primarily in U.S.-based Structured Credit securities. Orange Investment Advisors is defined as an independent investment management firm that is not affiliated with any parent organization. Policies for valuing investments, calculating performance, and preparing GIPS reports are available upon request.

Firm Verification Statement

Orange Investment Advisors claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Orange Investment Advisors has been independently verified for the periods August 1, 2018 through December 31, 2021. The verification report is available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firmwide basis. Verification does not provide assurance on the accuracy of any specific performance report. This composite was created in July 2021, and the inception date is September 1, 2018. A list of composite descriptions and a list of limited distribution pooled funds are available upon request.

Composite Description

The Structured Credit Value Strategy Composite includes all fee paying SMAs and Funds that invest in Structured Credit based on Orange’s Active Value Security Selection approach which is a bottom-up, value-based investment strategy. The strategy seeks to provide a high level of income and total return with low sensitivity to interest rates and credit spreads by taking advantage of opportunities in the inefficient and non-indexed structured credit market. Derivatives, including options, futures, and swaps, and short positions may be used, primarily for hedging or managing certain risks, including interest or credit spread risk. The account minimum for the composite is $1 million.

Benchmark Description

The benchmark for the composite is the Barclays Bloomberg U.S. Aggregate Bond Total Return Index. Index returns reflect the reinvestment of income, but do not include any expenses, such as transaction costs and management fees.

Performance Calculation

Valuations are computed and performance is reported in U.S. dollars.

Returns include the reinvestment of income and are presented gross and net of fees. Gross returns are net of transaction costs. Actual net returns are net of actual transaction costs, management fees, as well as other fund operating fees and expenses. Model net returns are supplemental to actual net returns and are calculated by reducing the monthly composite gross return by a model fee of 0.05417%, which equates to an annual model fee of 0.65%, the highest fee charged to any SMA client. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. Past performance does not guarantee future results.

Investment Management Fee Schedule

The standard annual fee schedule is: 0.65% on the first $100 million, 0.55% on the next $150 million, and 0.45% on all assets above $250 million under management.

Composite Dispersion

Internal dispersion is calculated using the equal-weighted standard deviation of annual gross returns of those portfolios that were included in the composite for the entire year. It is not presented (“N/A”) when there are five or fewer portfolios in the composite for the entire year.

Standard Deviation

The three-year annualized standard deviation measures the variability of the composite gross returns and the benchmark returns over the preceding 36-month period.

Trademark

GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

Important Disclosures

© 2023. Easterly Asset Management. All rights reserved.

Easterly Asset Management’s advisory affiliates (collectively, “EAM” or “the Firm”), including Easterly Investment Partners LLC, Easterly Funds LLC, and Easterly EAB Risk Solutions LLC  (“Easterly EAB”) are registered with the SEC as investment advisers under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training.  More information about the firm, including its investment strategies and objectives, can be found in each affiliate’s Form ADV Part 2 which is available on the www.sec.gov website. This  information has been prepared solely for the use of the intended recipients; it may not be reproduced or disseminated, in whole or in part, without the prior written consent of EAM.

No funds or investment services described herein are offered or will be sold in any jurisdiction in which such an offer or sale would be unlawful under the laws of such jurisdiction. No such fund or service is offered or will be sold in any jurisdiction in which registration, licensing, qualification, filing or notification would be required unless such registration, license, qualification, filing, or notification has been effected.

The material contains information regarding the investment approach described herein and is not a complete description of the investment objectives, risks, policies, guidelines or  portfolio management and research that supports this investment approach. Any decision to engage the Firm should be based upon a review of the terms of the prospectus, offering documents or investment management agreement, as applicable, and the specific investment objectives, policies and guidelines that apply under the terms of such agreement. There is no guarantee investment objectives will be met. The investment process may change over time. The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios. Client portfolios are managed according to mutually agreed upon investment guidelines. No investment  strategy or risk management techniques can guarantee returns or eliminate risk in any market environment. All information in this communication has been obtained from sources  believed to be reliable but cannot be guaranteed. Investment products are not FDIC insured and may lose value.

Investments are subject to market risk, including the loss of principal. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate. The information contained herein does not consider any investor’s investment objectives, particular needs, or financial situation and the investment strategies described may not be suitable for all investors. Individual investment decisions should be discussed with a personal financial advisor.

Any opinions, projections and estimates constitute the judgment of the portfolio managers as of the date of this material, may not align with the Firm’s opinion or trading strategies, and may differ from other research analysts’ opinions and investment outlook. The information herein is subject to change without notice and may be superseded by subsequent market  events or for other reasons. EAM assumes no obligation to update the information herein.

References to securities, transactions or holdings should not be considered a recommendation to purchase or sell a particular security and there is no assurance that, as of the date  of publication, the securities remain in the portfolio. Additionally, it is noted that the securities or transactions referenced do not represent all of the securities purchased, sold or recommended during the period referenced and there is no guarantee as to the future profitability of the securities identified and discussed herein. As a reminder, investment return and principal value will fluctuate.

The indices cited are, generally, widely accepted benchmarks for investment performance within their relevant regions, sectors or asset classes, and represent non managed investment portfolio. It is not possible to invest directly in an index.

This communication may contain forward-looking statements, which reflect the views of EAM and/or its affiliates. These forward-looking statements can be identified by reference to words such as “believe”, “expect”, “potential”, “continue”, “may”, “will”, “should”, “seek”, “approximately”, “predict”, “intend”, “plan”, “estimate”, “anticipate” or other comparable words. These forward-looking statements or other predications or assumptions are subject to various risks, uncertainties, and assumptions. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. Should any assumptions underlying the forward-looking statements contained  herein prove to be incorrect, the actual outcome or results may differ materially from outcomes or results projected in these statements. EAM does not undertake any obligation to  update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law or regulation.

Past performance is not indicative of future results.

 

20231020-3179418-10079945