Third Avenue Management, an investment company, has published its "Real Estate Value Fund" letter to investors for the second quarter of 2021 – a copy of which can be downloaded here. The fund posted a portfolio return of + 17.71% in the second half of 2021, which is below the FTSE EPRA NAREIT Developed Index, which gained 16.11% over the same period. You can view the fund's top 5 holdings to get an idea of their top bets for 2021.
In Third Avenue Management's letter to investors in the second quarter of 2021, the fund mentioned the Federal National Mortgage Association (NYSE: FNMA) and discussed its stance on the company. The Federal National Mortgage Association is a Washington, DC-based mortgage loan company with a current market capitalization of $ 1.5 billion. The FNMA has achieved a return of -45.61% since the beginning of the year, while its 12-month return has decreased by -35.00%. The stock closed at $ 1.30 per share on July 22, 2021.
Here's what Third Avenue Management said in its Q2 2021 investor letter about the Federal National Mortgage Association:
"The fund also matched its stake in the State Mortgage Association ("Fannie Mae") during the phase. As noted in previous letters to shareholders, in 2020 the fund took a position in the preferred and common stocks of Fannie Mae. In the opinion of the Fund Management, this company (together with Federal Home Loan Mortgage Corporation or "Freddie Mac" and collectively the state-sponsored corporations or "GSEs") has been (i) a major source of funding for sustainable home ownership and affordable rental housing in the United States, ( ii) was among the most profitable real estate companies in the world in terms of operating profit; and (iii) traded in securities at a fraction of their underlying value as the GSEs had operated under preservation since 2008.
In addition, fund management believed that the GSEs would eventually get out of this framework while continuing to build capital as outlined in the Federal Housing Finance Agency's (FHFA) strategic plan – a process that could be accelerated once legal Decisions of controversial changes to their seniors affect preferred stock purchase agreement (ie the "NetWorth Sweep"). However, given the significant "litigation risk" associated with such a significant repositioning, the Fund would limit the amount of capital invested in the companies despite unrivaled value for money.
During the quarter, the United States Supreme Court ("SCOTUS") issued orders in relation to two of the outstanding challenges. In Collins v. Yellen confirmed SCOTUS 'claims that the Conservatory was structured unconstitutionally, referred the case back to the Fifth Court of Appeal for possible "retrospective legal assistance", but declined to claim the entire net-worth sweep null and void on the basis of this particular constitution . Although this arrangement did not provide a complete remedy, other challenges in connection with the "Implied Covenant of Good Faith and Fair Dealing" and a "Processing, Illegal Exaction, and Breach of Implied Contract Claim" remain before the District Court and the Federal Court of Justice These cases have provided important lessons and will last through the remainder of 2021.
Regardless of a longer timeframe, the fund management continues to believe that administrative action is the most prudent option. In other words, the recapitalization of companies and their release as quasi-suppliers with improved capital ratios achieves important goals. This primarily involves (i) reducing the US taxpayer from the "first loss position" on the $ 6.5 trillion mortgages guaranteed by the companies; (ii) providing more stability and capital to the companies Businesses to fulfill their mission of promoting affordable housing and (iii) protecting property rights while maintaining value for GSE stakeholders (including the US Treasury Department).
One such plan was recently published in the Brookings Institute Report: Government Sponsored Enterprises at the Crossroads. It's also one that has been carefully assessed by the Congressional Budget Office (CBO) in terms of its impact of recapitalizing Fannie Mae and Freddie Mac through administrative measures. As noted in this analysis, "the CBO model takes into account the assessment that in scenarios where the sale of GSE's common shares did not raise enough funds to repay the full par value of both the senior and subordinated preferred shares, a reduction in the value of its senior preference share before the subordinate shareholders are obliged to do so. "
With all of these positions taken into account, as well as the price anomalies in the capital structures, the Fund's remaining investment in the GSEs is now focused solely on the preferred stocks. At the end of the quarter, these holdings represented approximately 2.0% of the fund's capital and the securities were trading at prices less than 10% of their liquidation preference (e.g., "face value"). In the meantime, companies remain reasonably profitable and are rebuilding significant capital while matters are dealt with. "
The story goes on
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Based on our calculations, the Federal National Mortgage Association (NYSE: FNMA) was unable to rank on our list of the 30 most popular stocks among hedge funds. FNMA was there 4th Hedge fund portfolios at the end of the first quarter of 2021. The Federal National Mortgage Association (NYSE: FNMA) returned -46.50% over the past 3 months.
The reputation of hedge funds as shrewd investors has been tarnished over the past decade as their hedged returns have not kept up with the unsecured returns of market indices. Our research has shown that hedge fund small-cap stock selection beat the market by double digits annually between 1999 and 2016, but the outperformance margin has been decreasing in recent years. Nevertheless, we were able to identify a selected group of hedge fund holdings in advance that exceeded the S&P 500 ETFs by 115 percentage points since March 2017 (details see here). We were also able to pre-identify a select group of hedge fund holdings that lagged the market 10 percentage points annually between 2006 and 2017. Interestingly, the underperformance margin of these stocks has increased in recent years. Investors who take long positions in the market and short these stocks would have earned more than 27% annual return between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article was originally published on Insider Monkey.
source https://seapointrealtors.com/2021/07/24/should-you-consider-investing-in-federal-national-mortgage-association-fnma/
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