Portfolio Management 101 > Mortgage REITs

Annaly Adjusts Portfolio Drivers As Visibility Improves

Annaly Capital Management

Back in April, I wrote an article on Annaly (NLY) where I expressed my opinion that Annaly is a sleep well at night investment, if invested in correctly. (Read Article) I have to admit that this was probably not the most accurate way for me to express my opinion about Annaly. You see, my philosophy is more focused on overall returns on a portfolio and that if you have a portfolio of sleep well at night investments then it is likely your returns will not be much better than the risk-free rate. Everyone knows that, right? It is investing 101, or if I can throw in a shameless plug, portfolio management 101. In fact, if investing in a portfolio that was only generating the risk-free rate for a long period of time, I could wake up from my slumber realizing that the value of my portfolio has barely kept up with inflation, if at all.

Annaly: Can You Invest In It And Still Sleep Well At Night?

Annaly Capital Management

Have you ever had a very bad experience with Mortgage REITs? Just last year, it was painful to watch as Annaly (NLY), American Capital Agency Corp. (AGNC), Armour Residential (ARR) and others declined 25% or more in just two months. I understand why we have such distaste for them. It could be because of similarly bad experiences or maybe we just don’t like to see such volatile moves. Or perhaps we avoid them because they are so difficult to understand that they keep us up at night if we own shares in any of them… even if just a few shares. They certainly aren’t the traditional dividend growers that have increased dividends over long periods of time but hey, they do pay some seriously high dividends in normal economic environments. Should we be investing in them?

Investors who don’t know or understand them should certainly not invest in them!! As Peter Lynch has often been quoted as saying:

Invest in what you know

It is one of Lynch’s investment principles, and is the concept behind his book, One Up on Wall Street. As investors, we would be wise to follow that advice. But we do have options.

Mortgage REITs: Proceed Without Fear

Annaly Logo

I wrote an article on December 24th, 2013 about how Annaly’s price seemed to be at a bottom.(Read Article) While other authors on this site were suggesting to run for the hills, I hope you heeded my advice and put at least some money to work on NLY. Investors who did have benefitted from a 13%+ return since then, including dividends paid. Whether or not Annaly can continue its positive performance is the subject of another article I am working on. But in the meantime, I think its interesting that the Annaly logo is the family crest and reads, “Prodesse Non Nocere”, which means “proceed without fear”. I wanted to provide some additional insight into mortgage REITs as an asset class so that investors can invest in them intelligently, without fear, and without having to read from those that try to instill fear.

 

 

 

The Annaly Knife May Have Stopped Falling

Do not catch a falling knife

When interest rates spiked over the Summer, the share prices of Annaly and other mortgage REITs were punished and it was painful to hold on to these stocks despite the mid to double digit dividend yields they were paying. Now that the economic situation has settled down a bit and visibility on the Fed’s tapering intentions has become clearer, the mortgage REIT shares have been much less volatile. While there may still be some downside risks, such as unexpected spikes in interest rates, quicker Fed tapering, and another increase in prepayment rates, to name a few, the shares of Annaly and other mortgage REITs look compelling.

 

We think that interest rates WILL rise in 2014, but we think it will happen slowly and that the impact this will have on the mREITS has already been discounted into the stock price. These types of investments are not for investors who can’t deal with volatility in share price movements, but if your time horizon is long-term, it may be a good time to take a closer look.

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