Valuation of the underlying loans supporting residential mortgage backed securities is at the core of Mariemont Capital’s investment philosophy. We believe successful investing is based on understanding the profile and composition of the borrowers and consequently the likelihood of default and principal recovery rate. The price paid for the security is the most important driver of expected investment return. It is through years of experience, the fund manager has developed successful techniques necessary to identify the value of the RMBS.
Mariemont Capital employs a strong fundamental approach to determine value. We strive to invest in securities that generate sustainable cash flow over time, have strong borrowers, and trade at a discount to par. We spend time evaluating housing trends, security structure, borrower profile, vintage, underwriter, duration and convexity of prospective investment. We also test valuation relative to other comparable securities throughout the debt market and believe differences often highlight investment opportunities.
Patience is critical to our value investing approach. We often identify potential opportunities and set a target price that must occur for us to establish a position. This approach allows us to have more confidence that our valuation hypothesis is correct. Concurrently, we are willing to hold a position for an extended period if we believe our core hypothesis remains intact.
Mariemont Capital seeks to capitalize on its valuation analyses by buying undervalued securities and selling out of positions we feel are priced above our level of valuation.
Mariemont Capital offers a few points of differentiation to complement its disciplined analytical approach. First, the principals of Mariemont Capital are highly experienced market makers. Our managing partner has a proven track record of profiting from multiple interest rate cycles and the credit crisis. It is the unique understanding of the opaque and complex network of the residential debt market, which offers tremendous value to our investors. Second, we do not depend on rating agencies or Wall Street to validate our investment selections. It is our deep understanding of complex securities and our ability to make rapid decisions during a time of heavy government regulation, which creates even greater value for our investors. Lastly, Mariemont Capital understands the value of investing in interest bearing securities and the benefits and drawbacks associated with the use of leverage. We always want to be the entity taking advantage of others misfortune, for example a “forced liquidation” resulting from a margin call. We never want to be that institution. We will vehemently monitor debt to equity ratios. The fund will not exceed a 1 to 1 equity to debt ratio.
Active involvement in the market making process allows Mariemont Capital to feel the depth and direction of the market. Our established network of market participants enables us access to investment opportunities open to only a select few. Currently, the prohibitive costs related to analytical tools and the lack of price discovery within the non-agency residential mortgage market, keeps trading margins wide and the number of competitors small. Overbearing regulatory burdens placed on traditional market makers is now exacerbating the opportunity allowing experienced private market makers to capitalize.