Why I'm Long Helios Total Return Fund

I opened a new position yesterday: long Helios Total Return Fund (HTR).

This is a somewhat risky fund because more than 50% of it is invested in various mortgage backed securities. On the other hand, it pays more than 11% dividend, with monthly payments.

Over the last several days, HTR's price was going down, while the Net Asset Value (NAV) of the fund was going up a little bit. Currently the fund is valued at about a 9% discount.

My bet is that mortgage backed securities are currently undervalued and HTR is undervalued against the underlying assets. The high dividend doesn't hurt either.

Comments

[igggy:]

> My bet is that mortgage backed securities are currently undervalued and HTR is undervalued against the underlying assets.

Why would they be undervalued if the Fed has bought $1T of those?

Nov 12 02:21 AM

[GlobalTrekker:]

May indeed be a good investment. We rate it neutral to its category and have a sell on a small long position. My concern is its leverage which it uses partially to pay a rather high mgmt fee of 2.1%, though that's not high for the category. It's not clear to me why management needs a 2.1% annual reward for holding a large portfolio of Fannie Maes and the like. It seems you could assemble this for about 30 basis points and still have handsome income to manager and shareholder alike. The manager, however, seems very sharp, and there may be an argument that agency debt can rise soon (though I wouldn't make it ... seems there is quite a bit of this debt overhanging the market). But I worry about the dividend. It seems unsustainable, and they don't explain how much is a return of capital. With moderate leverage, a 2.1% haircut, and underlying notes paying 4.5% and the like, how do you keep an 11.3% dividend? I like the short duration of the portfolio, but everything else looks a bit skittish to me.

Nov 12 04:19 AM

[Thomas Smic...:]

I am most reluctant to get into this product at this time.

Nov 12 09:51 AM

[Alex Filonov:]

Thank you for comments.

GlobalTrekker, I agree with you, I'm planning a short-term holding of this fund. Yes, underlying notes pay 4.5% of nominal, but I don't think HTR paid nominal price for them. Current leverage is under 18%, not that bad.

Nov 12 06:11 PM

[Alan Young:]

You seem not to have done your DD. According to the fund's quarterly fact sheet, www.brookfieldim.com/_..., 33% of this fund is in below-investment-grade bonds. The management fee of 1.26% (the additional .79% is interest expense, not management) is very reasonable for this kind of portfolio.

If you want to do some real research, dig into that portfolio and find out what kind of junk is in it: they don't report any ratings below BBB, so it may be full of unrated or seriously impaired debt.

Nov 13 04:04 AM

[Alex Filonov:]

I know that Helios holds a lot of junk bonds. So what? They are priced according to their status and pay bigger coupons. Yes, default probability is higher, but that's the usual risk/reward decision.

On Nov 13 04:04 AM Alan Young wrote:

> You seem not to have done your DD. According to the fund's quarterly
> fact sheet, www.brookfieldim.com/_...,
> 33% of this fund is in below-investment-grade bonds. The management
> fee of 1.26% (the additional .79% is interest expense, not management)
> is very reasonable for this kind of portfolio.
>
> If you want to do some real research, dig into that portfolio and
> find out what kind of junk is in it: they don't report any ratings
> below BBB, so it may be full of unrated or seriously impaired debt.

Nov 14 12:28 AM