Jason: Hi, I'm Jason Mandinach and I'm joined here today by Dan Hyman and Alfred Murata, co-managers on the PIMCO mortgage opportunity strategy. Dan and Alfred, how important is active management in the securitized mortgage market?

Alfred: Active management’s extremely important, both in the agency mortgage-backed securities area and in the non-agency mortgage-backed securities area. The non-agency space, there tends to be tremendous opportunities when bonds, first when they get downgraded, many investors are forced to sell. That provides a good opportunity to buy the securities.

As credit performance stabilizes, oftentimes some of these bonds appreciate significantly in price. That provides a good opportunity to sell these investments. In the agency mortgage-backed securities space, again, there are many opportunities. I'll let Dan continue.

Dan: An active approach to managing within the agency mortgage market has been a value proposition for investors over the years. Choosing between an allocation to government-guaranteed mortgages or treasuries can provide returns for investors that are not correlated to other asset classes. They're not correlated to your traditional bond betas. You can generate returns without changes in interest rates, which can be an attractive proposition for people.

The ability to not be tethered to a benchmark: When the Fed came in and said “we're going to buy 1.25 trillion mortgages,” and then they increased that, active managers had the ability to go overweight, take advantage of that, ride the wave. And then when they hit extreme valuations we had the ability to reduce our holdings, to go underweight or even short against those extreme valuations.

Again, providing returns that are not correlated with traditional bond betas. It doesn’t have to do with credit risk, it doesn’t have to do with interest rate risk. But can generate excess returns for investors.

Jason: One of the topics that's on a lot of investors’ minds is rising interest rates. And historically in the traditional mortgage market, rising interest rates has been a negative. How do you guys think about rising interest rates and managing the mortgage opportunity strategy in what could potentially be a rising interest rate environment?

Dan: So I think we look to build a diversified portfolio. There have been many consensus forecasts for rising interest rates for several years that have not come to fruition. If you look back to the end of last year, the Fed’s dot plot forecasted four rate hikes in one year, and that didn’t come to fruition, was only one rate hike.

And so it's not certain we're going to a rising rate environment, and we try to build portfolios that are diversified in nature to do well across a variety of economic scenarios. If the Fed has to raise rates or if rates are to move lower, we want to build a portfolio that does well across scenarios. One of our advantages, though, is we're not tethered to a traditional benchmark.

The Barclays Agg has a duration of around five and a quarter. So pretty high duration. We can manage that much more actively when we believe that returns are going to be positive from a long duration position, we can increase them. When we believe duration provides less of a hedge and less of a good expected return, we can reduce that, and we manage that quite actively.

There are other exposures in our portfolios that we believe can do quite well in a rising rate environment. And so we pair some of our strategies that do well in a low-rate environment with our strategies that would do well in a rising rate environment to do well across a variety of economic scenarios.

Jason: Alfred, how do you think about the mortgage opportunity strategy in what potentially could be a rising rate environment?

Alfred: So we have a flexibility to adjust interest rate duration negative one to eight-year duration band. So we can actually benefit from rising rates. The way that we adjust interest rate duration in the portfolio is that we can shift from fixed rate mortgages to floating. Also, something that could benefit from a rising rate environment are the non-agency mortgage-backed securities in the portfolio.

In a rising rate environment we typically think that's going to coincide with increases in housing prices, and if housing prices increase, that should benefit the non-agency mortgage-backed securities in the portfolio.

Jason: Thank you very much for your time. Really appreciate it, guys.