AlphaCentric Income Opportunities Fund - IOFAX, IOFCX, IOFIX Second Quarter Investor Call
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AlphaCentric Income Opportunities Fund
IOFAX, IOFCX, IOFIX
Second Quarter Investor Call
July 30th, 2020Q2 Marks Yet Another Sharp Reversal
0.63% Treasury Bills 0.02%
0.02%
8.20% Treasuries 0.48%
0.48%
3.15% Barclays Agg 2.90%
2.90%
-11.30% Euro Corp. HY 4.17%
4.17%
-23.53% Commodities 5.04%
5.04%
-7.55% Euro Corp. IG 7.28%
7.28%
-4.68% All Global Credit 7.68%
7.68%
-13.68% U.S. Lvrged Loans 9.42%
9.42%
-2.97% U.S. Corp IG 9.72%
9.72%
-12.68% U.S. Corp HY 10.18%
10.18%
-8.86% EM Corp. $ Bonds 10.65%
10.65%
-11.61% EM Sovereign $ Bonds 10.93%
10.93%
3.95% Gold 12.92%
12.92%
-19.17% Asia-Pacific Stocks 15.97%
European Stocks 15.97%
-24.60% 16.65%
-23.57% EM Stocks 18.14%
18.14%
-20.94% World Stocks 19.57%
19.57%
-19.60% S&P 500 20.54%
20.54%
-36.18% IOFIX 20.97%
20.97%
-66.46% WTI Crude 91.75%
91.75%
-70% -60% -50% -40% -30% -20% -10% 0% 10% 0%0% 10%
10% 20%
20% 30%
30% 40%
40% 50%
50% 60%
60% 70%
70% 80%
80% 90%
90% 100%
100%
Q1 2020 Q22020
Q2 2020
Note: Performance are calculated as daily total return including dividends as of 6/30/20. Results may differ substantially over time. Data represents past performance and does not guarantee future returns.
Current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, therefore, an investor's shares, when redeemed, may
be worth more or less than their original cost. You cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.
Source: Bloomberg as of 6/30/20. IOFIX uses ticker “IOFIX US Equity", Treasury Bills "LD20TRUU Index", Treasuries "LUATTRUU Index", U.S. Leveraged Loans "IBOXLTRI Index", Barclays Aggregate "LBUSTRUU
Index", Gold "XAU BGN Curncy", Emerging Mkt Corporate $ Bonds "BSEKTRUU Index", U.S. Corporate High Yield "LF98TRUU Index", All Global Credit "LGDRTRUU Index", U.S. Corp. Investment Grade "LQD US
Equity", Emerging Mkt Sovereign $ Bonds "BSSUTRUU Index", S&P 500 "SPX Index", Euro Corporate Investment Grade "SPEZICET Index", Euro Corporate High Yield "ENHAHYEU Index", World Stocks "MXWO
Index", Commodities "BCOM Index", Asia-Pacific Stocks "MXAP Index", EM Stocks "MXEF Index", European Stocks "BE500 Index", WTI Crude "CL1 Comdty“.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
2Performance Comparison Last 5 Years
Total Return: June 30, 2015 to June 30, 2020
Income Opportunities Barclays Barclays U.S.
Fund (IOFIX) Aggregate Baa Index High Yield S&P 500
Q2 2020 +20.97% +2.90% +11.23% +10.18% +20.54%
1 Year -18.15% +8.74% +8.17% +0.03% +7.49%
3 Year -3.72% +16.83% +19.81% +10.33% +35.73%
5 Year +18.37% +23.45% +32.63% +26.35% +66.38%
190
180
170
+66.38%
160
Total Return (indexed to 100)
150
140
+32.63%
130
+26.35%
+23.45%
120 +18.37%
110
100
90
80
6/30/15 6/30/16 6/30/17 6/30/18 6/30/19 6/30/20
Income Opportunities Fund (IOFIX) Barclays Aggregate Baa Index Barclays US High Yield S&P 500
Note: Performance are calculated as daily total return including dividends as of 6/30/20. Results may differ substantially over time. Data represents past performance and does not guarantee future returns.
Current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, therefore, an investor's shares, when redeemed, may
be worth more or less than their original cost. You cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. To obtain the most recent month end
performance information or the funds prospectus please call the fund, toll free at 1-844-ACFUNDS (844-223-8637).
Source: Bloomberg. Barclays Aggregate “LBUSTRUU Index”, Barclays US High Yield “LF98TRUU Index”, S&P 500 “SPX Index”, Baa Index “LUBATRUU Index”.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
3IOFAX Performance
AlphaCentric Income Opportunities Fund:
1-Year, 3-Year and Since Inception Annualized Return (5/28/15-6/30/20)
15%
8.74%
10%
4.22% 5.32% 4.03%
5% 3.23%
0%
-5% -1.48%
-3.07%
-10%
-15%
-20%
-18.39%
-25% -22.24%
Class A 1YR Class A 3YR Class A Since Barclays Agg. Barclays Agg. Barclays Agg. Class A w/ Load Class A w/ Load Class A w/ Load
Inception 1YR 3YR Since Inception 1YR 3YR Since Inception
The Fund’s maximum sales charge for Class “A” shares is 4.75%. Total annual fund operating expenses are 1.75%, 2.50%, and 1.50% for
Class A, C, and I shares respectively. Investments in mutual funds involve risks. Performance is historic and does not guarantee future
results. Investment return and principal value will fluctuate with changing market conditions so that when redeemed, shares may be
worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain the
most recent month end performance information or the funds prospectus please call the fund, toll free at 1-844-ACFUNDS (844-223-8637).
You can also obtain a prospectus at www.AlphaCentricFunds.com.
Bloomberg Barclays U.S. Agg. Bond Index is used to represent the U.S. corporate bond market. Index does not directly correlate to the AlphaCentric Fund. RMBS and ABS securities have
different characteristics from investment grade bonds. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
4Historic Fund Outflows Across Bond Universe
Weekly Global Fund Flows: February 2020 to June 2020
30
$25 B
$20 B
20 $11 B
$14 B $15 B
$4 B $13 B $13 B $12 B
$12 B $4 B $11 B $11 B
$9 B $6 B
10
WoW Global Fund Flows ($B)
0
(10)
($11 B)
(20)
($11 B)
($26 B)
(30)
(40)
($44 B)
(50)
($52 B)
(60)
2/19 3/4 3/18 4/1 4/15 4/29 5/13 5/27 6/10 6/24
AGG Type Mortgage Backed IG Credit High Yield
Source: Source: EPFR, Haver Analytics, Goldman Sachs Global Investment Research. Data as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
5Non-Agency RMBS Daily Trade Activity Has Appeared to Normalize
Daily and Average Trade Volume: Q2 2020
$12 $12
$11.5 B
$48 billion total volume traded between 3/15 to 4/15, ~4x
higher than the $13 billion implied at Jan/Feb averages
$10 Forced selling and margin calls from levered holders incl. REITs
$10
Large Non-agency RMBS books unwound
Leverage reduction and term repo implemented
$8 $8
Trade Volume ($B)
Trade Volume ($B)
$6 $6
$5.3 B $5.3 B
$4 $3.5 B $4
$2.4 B
$2 $1.77 B $2
$1.27 B
$714 M $746 M
$581 M
$ $
3/2 3/10 3/18 3/26 4/3 4/14 4/22 4/30 5/8 5/18 5/27 6/4 6/12 6/22 6/30
Daily Trade Volume January & February Avg. Daily Trade Volume Monthly Daily Average
Source: TRACE FINRA. Data as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
6New Private Label Issuance Offsets Declining Volumes
In 2007, the Legacy RMBS market peaked at ~$2.1 trillion in size
Today, there is approximately $249 billion outstanding Legacy RMBS, but shrinking by ~16% per year
Legacy and Post-2009 Non-Agency Outstanding Balances: 2005 to Q2 2020
$2,250
2019 Issuance ($Bn) 2020 Forecasted ($Bn)
$2,000 Legacy RMBS - -
CRT 13 9
$1,750 Jumbo 2.0 15 17
Outstanding Amount ($ BN)
Non-QM 32 10
$1,500 RPL 48 8
NPL 16 7
$1,250 SFR 4 5
Total 128 56
$1,000 $2,051
$1,745 $1,769
$750 $67
$1,457 $86 $55 $81 $105 $111
$16 $120
$1,230 $38 $49 $56 $56
$1,156 $23 $159
$500 $1,047 $30 $199 $231 $258 $265
$879 $33
$735 $41
$641 $71
$548 $87 $89
$250 $464
$386 $324 $269 $249
$0
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Q2 20
Legacy Pre-2008 Non-Agency RMBS Post-2009 (2.0/Non-QM) Freddie K CRT Seasoned RPL Seasoned NPL
Source: Amherst and Bank of America Merrill Lynch as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
7U.S. Fixed Income Yield Landscape
Fixed Income Yields Last 15 Years
24
22
20
18
16
14
Yield (%)
12
10
8
+6.9%
6
4
2 +2.1%
+1.3%
+0.6%
0
Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19
U.S. 10 yr High Yield IG Corp Barclays Aggregate
Source: Bloomberg. Data as of 6/30/20 . IG Corp and High Yield indices do not correlate to IOFIX, whose RMBS and ABS securities have different characteristics to these indices. High Yield uses ticker “LF98TRUU
Index”, IG Corp “LUACTRUU Index”, Barclays Aggregate “LBUSTRUU Index”, U.S. 10 Yr “GT10 Govt”.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
8Yields Drop, Duration Extends For Majority Of U.S. Fixed Income Universe
Categorical Change in Duration and YTW: June 2019 to June 2020 U.S. Aggregate Composition: June 2020
June '20 Duration Δ in Duration June '20 YTW Δ in YTW
U.S. Trea s ury & Govt Rel a ted 6.99 +0.71 0.60 -1.40
U.S. MBS
Corpora te 8.54 +0.90 2.15 -1.01 26.8% U.S. Treasury
& Govt
CMBS 5.33 +0.06 1.72 -0.82
ABS Related
ABS 2.11 -0.04 0.85 -1.36 0.4% 43.2%
CMBS
U.S. MBS 2.07 -1.09 1.36 -1.34
2.2%
Corporate
Total 6.04 +0.31 1.25 -1.24 27.4%
U.S. Aggregate Duration vs. YTW: June 2019 to June 2020
6.1 2.8
2.5 6.0
6.0
2.3 2.4
Yield to Worst (%)
5.9 5.9
Duration
2.0
5.8
5.7
1.6
5.7
1.3
5.6 1.2
Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20
Agg Duration (left axis) Agg Yield to Worst (right axis)
Source: Barclays. Data as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
9Mixed Signals For The Mortgage Market
Bear Case / Negatives Bull Case / Positives
Housing credit conditions tightening Mortgage affordability still favors ownership
Unemployment rate still elevated Mortgages interest rates very low and declining
Bankruptcies and restructurings on the rise Household formation and US population growth
Mortgage delinquencies going up Homebuying demand and sentiment strong
Fiscal and monetary stimulus extensions uncertain Single-family over multifamily story underway
Home prices expected to be relatively stable
Supply and inventory shortage persists
Recent delinquencies and forbearance spike beginning to
plateau
Source: Internal. Figures above shown for illustrative purposes only.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
10Legacy RMBS Delinquencies Rising As Expected
Rise in recent delinquencies mostly attributed to forbearance
Similar to the 2018 hurricanes, COVID-related forbearance has an expected 85%+ cure rate
Percent of 90+ Days Delinquent Loans: 2005 to Q2 2020
16%
13.9%
14%
12%
10.6%
90+ Delinquencies (%)
10%
8.4%
8.0%
8%
6% 6.1%
4%
2%
1.1%
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Legacy RMBS
Source: Amherst Pierpont and Nomura. Data as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
11Resilient U.S. Home Price Growth Despite Market Volatility
Median Home Price Growth: 2015 to Q2 2020
140% June ‘21
Q1 2020 Q2 2020 YoY: +3.2%
Zillow +1.1% +1.1% 133.0%
135%
Federal Housing Finance Agency +0.9% - 132.2% 133.0%
June ‘21
Fannie Mae +1.2% +2.7% YoY: +1.7%
130%
S&P CoreLogic Case Shiller +1.6% +3.2%
Median Home Prices (Indexed to 100)
125%
May ‘21
YoY: (6.6%)
120%
115%
110%
105%
100%
PROJECTED
95%
2015 2016 2017 2018 2019 2020 2021
Zillow Federal Housing Finance Agency Fannie Mae S&P CoreLogic Case Shiller
Source: Zillow and Bloomberg. S&P CoreLogic Case Shiller uses “SPCS20 Index”, Fannie Mae “FANNMDNW Index”, and Federal Housing Finance Agency “HPI LEVL Index.” Data as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses. The forecasts and/or opinions may not come to pass and are subject
to change. More recent performance may alter the assessments or outcomes stated herein.
12Housing Demand Increasing As Population And Households Increase
U.S. Housing Metrics: 1966 to 2030 (Projected)
400 M 70%
PROJECTED
350 M
69%
300 M
68%
Homeownership Rate (%)
250 M
People (Millions)
67%
200 M
66%
150 M
65%
100 M
64%
50 M
0 63%
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030
US Population (left axis) US Households (left axis) Number of Homeowners (left axis) Homeownership Rate (right axis)
Source: US Census Bureau and Joint Center for Housing Studies of Harvard University. Data as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses. The forecasts and/or opinions may not come to pass and are subject
to change. More recent performance may alter the assessments or outcomes stated herein.
132005 vs. 2020 Newly Built Home Sales by Price Tier
There are more newly built homes sold at higher priced tiers today than during the housing boom before the great financial crisis.
250
200
New Home Sales (thousands)
150
100
50
Under $125K to $150K to $200K to $250K to $300K to $400K to $500K to $750K and
$125K $149K $199K $249K $299K $399K $499K $749K over
2005 Q1 2020 Annualized
Source: US Census Bureau. Data as of 3/31/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
14Gap Between Single-Family New Listings and Purchase Applications Has Widened
There has been a surge in recent purchase mortgage applications and home inventory has not kept up, which has supported home prices
0.7 350
0.6 300
0.5 250
Mortgage Applications (Indexed to 100)
New For Sale Inventory (M)
0.4 200
0.3 150
0.2 100
0.1 50
0.0 0
2016 2017 2018 2019 2020
US Existing Homes New Listings (left axis) Purchase Mortgage Applications (right axis)
Source: Bloomberg. Purchase Mortgage Applications: MBAVNSAP Index, US Existing Homes New Listings: ETSLNEWL Index. Data as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
15US Home Sales Near Highest Affordability In Almost 5 Decades
Home prices reach second most affordable time since 1975, with annual payments for existing homes comprising only 17.6% of income
50% 49.3%
47.5%
45%
Monthly Mortgage to Median Income (%)
40%
36.6%
35%
30.8%
30% 29.1%
28.0%
25%
20% 21.0%
20.3%
17.6%
15%
14.5%
10%
1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019
US New Home Sales US Existing Home Sales
Source: Bloomberg, US Census Bureau, Freddie Mac. Median Income: HOUIMEDC Index, Existing Home Sales: HSANETMP Index. Data as of 6/30/20. Loan payments assume 20% down payment, 30-year fixed loan.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
1630 Year Fixed Rate Has Dropped 241 Bps Since November 2018
Assumptions November 2018 June 2020
$200K Home Value 4.63% Mortgage Rate 2.22% Mortgage Rate
20% Down $160K Loan Value $823 Monthly Payment $609 Monthly Payment (26% less)
30 Year Mortgage Rate vs. 10 Year US Bond: September 30, 2018 to June 30, 2020
5.0 5.0
4.63%
4.10%
4.0 4.0
3.69%
3.36%
3.30%
10 Year US Govt Yield (%)
30 Year Fixed Rate (%)
3.0 3.0
2.85% 2.60%
2.22%
2.0 2.0
Spread Between Indices 1.48%
1.0 10/1/18 to 2/1/20 6/30/20 1.0
137 bps 156 bps
0.66%
0.54%
0.0 0.0
Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20
Fannie Mae 30 Year Fixed Commitment Rate (left axis) 10 Year US Government Yield (right axis)
Source: Bloomberg. Fannie Mae Commitment Rates 30 Year Fixed Rate 60 Day: FNCR3060 Index, 10 Year US Government Yield: GT10 Govt. Data as of 6/30/20. Mortgage loan payments assume 20% down
payment, 30 year fixed loan.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
17Mortgage Refinancings Are Accelerating
Mortgage Prepayment Rates: June 2018 to July 2020
Today’s lower mortgage rates could increase the likelihood of faster prepayments
70
64.9
Fannie Mae 4% WAC IOFIX Portfolio WAC
60
4.85% 4.61%
55.2
54.1
50
Voluntary Prepayment Rate (%)
44.7
40
30
21.9
20
9.0
10 10.3 9.6
6.5
5.0
6.5 5.0 5.9 5.9 5.7
4.5 4.4 5.3
0
Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20
Fannie Mae 4% 1 Month VPR Portfolio 1 Month VPR
Source: Bloomberg and Internal. Portfolio VPR and WAC represent an avg. weighted calculation of the portfolio, based on available data. 1M Fannie Mae VPR rates: FNCL 4 4/20. Data as of 7/01/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
18Non-Agency Subprime RMBS: 5 Levels of Defense
Lower $817 monthly payment
1 Homeowner Borrower Support from unemployment, stimulus checks, refundable tax credits, forbearance,
loans, etc.
Levels of Protection
55.9% LTV ($150K loan vs. $268k home value)
2 Loan-to-Values
Provides enough asset coverage in event of default/liquidation
Equals Gross WAC – Servicing Fee – Avg. Weighted Bond Coupon
3 Excess Interest
4.6% - 50 bps – 0.86% Avg. Coupon 324 bps excess
4 Deal Subordination Lower tranches in the capital structure will absorb losses first
Purchase discount can provide margin of safety, an important component of total return
5 Discount of Bond Price
Legacy RMBS Portfolio Avg. Current Price = $65.87
Source: Bloomberg and internal. Data as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
19Excess Interest Mechanisms Unique to Subprime Legacy Non-Agency RMBS
Excess interest is the residual cash flow post scheduled payments to servicers/agents, tranche holders
It usually is the greatest in subprime structures by design and enhances internal credit of deal structure
Serves as first line of defense against losses from delinquencies and defaults, and potentially for repair credit support and write back losses
1 Mo Libor vs. Portfolio Net WAC/Excess Interest: Last 12 months
Pool of Mortgages 4.5 4.5
2005 Vintage
Borrowers Subprime Borrower 4.0 4.0
-16 bps
Principal & 55% HPI-LTV Less 50 bps
Interest $150k Current Loan Size servicing fee
14% 90+ days delinquent 3.5 3.5
Gross WAC = 4.6% + interest +172 bps
Net WAC = 4.1%
3.0 3.0
C/S
2.5 2.5
Percent (%)
Percent (%)
Size Class Support
30% A1 70% 2.0 2.0
20% A2 50%
15% M1 35%
1.5 1.5
15% M2 20%
10% B1 10% LIBOR + 70 bps
Avg. Coupon
5% B2 5% 1.0 1.0
= 0.86%
5% Equity 0%
0.5 0.5
Overcollateralization
-206 bps
4.1% - 0.86% = 3.24% Excess Interest 0.0 0.0
Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20
Portfolio Net WAC Portfolio Excess Interest 1 Month LIBOR
Note: This example is for illustration purposes only and shows a simple cash flow waterfall as it relates to excess interest. Specific figures are made to mimic an “example” subprime deal structure.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
20U.S. Aggregate Historical Performance
Treasuries and corporate securities have rebounded from the March market sell off due to the magnitude of unprecedented government stimulus
$120
$115
$113.25
$111.33
$110
Prices ($)
$106.67
$105
$100
$95
Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20
U.S. Treasury Corporates Mortgages
Source: Barclays. Data as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
21IOFAX: Portfolio Overview
Mutual Fund Fixed Income Sector Breakdown HPI-LTV Distribution (1)
37%
80% 75.6%
25% 55.9% HPI-LTV
60% portfolio average
19%
% of Total
40%
9%
20% 3% 4% 3%
9.3% 9.0% 11%
3.8%
1.2% 0.8% 0.2% 0.1%
0% 0% - 20% - 40% - 60% - 80% - 100% - 120%+
Legacy Credit Risk Cash & MBS ETF Other Reperforming Multifamily Asset Backed Line of 20% 40% 60% 80% 100% 120%
RMBS Transfer Equivalents Securities Loans Securities Credit
"CRT" "RPL" "ABS"
Housing Price Index – Loan to Value Distribution
Current Price Distribution (1) % Floating vs. Fixed Rate (1) Borrower Credit Breakdown (1) Vintage Breakdown (1)
50.3% 3% 0% 1
Total Portfolio 12% 9
Avg Curr Px: $70.10 8
38% 7
Legacy RMBS
Avg Curr Px: $65.87 87% 6
27.8%
97% 5
4
15.3%
3
47%
2
5.3% 2%
1.3% 1
11% 3%
0
$0 - $20 $20 - $40 $40 - $60 $60 - $80 $80+ % Floating % Fixed Prime Alt-A 2002 & Earlier 2003 - 2005
Subprime Multifamily 2006 - 2007 Post 2007
(1) Calculations excludes cash equivalents (9.0%), and other securities (1.2%); in aggregate exclusions total 10.2% of portfolio.
Source: Bloomberg, Intex, and internal. Note: GPC portfolio above shown for illustrative purposes only. Portfolio composition, investment characteristics and performance are all estimated as of 6/30/20 and
may differ substantially over time. Investing in lower borrower credits (i.e. subprime loans) may incur a higher risk of non-payment of interest and loss of principal.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
22Mutual Fund Portfolio Collateral Analysis
Portfolio Overview (1) Legacy RMBS Position Statistics (2)
Approximately 73% of portfolio is composed of securities with market Over 200k residential home loans back the fund’s predominantly floating rate
value greater than $5 million portfolio
Today Today
Total AUM ($) $2.85 billion Avg. Current Loan Balance ($) $149,889
# Securities Held 518 Avg. Home Value ($) $268,253
Weighted Average Loan Age 156 months Total # Loans Underlying 223,675
% Floating / % Fixed 97% / 3% Avg. # Loans Per Security 799
Weighted Average Loan Age 176 months
Position Sizes (current mkt. value) % of Total
Legacy RMBS Collateral Historical Performance (2)
$0 to $1mm 1.6%
Fundamentals of collateral continue to improve each year
$1mm to $2.5mm 9.3%
$2.5mm to $5mm 16.1%
1 Year 2 Years 3 Years
$5mm to $7.5mm 14.6% Today Trend
Ago Ago Ago
$7.5mm to $10mm 15.4% 73% 90+ Day
15.1% 15.5% 17.7% 19.0% Improving
Delinquencies (DQ)
$10mm+ 43.0%
HPI-LTVs 55.9% 59.3% 62.3% 67.2% Improving
Source: Bloomberg. Figures above shown for illustrative purposes only. Portfolio composition and investment characteristics are all estimated as of 6/30/20, may differ substantially over time, and should not
be considered investment advice. Collateral historical perf. figures represent an avg. weighted calculation of the portfolio and based on available data.
(1) Calculations excludes cash equivalents (9.0%), and other securities (1.2%); in aggregate exclusions total 10.2% of portfolio.
(2) Calculations only include legacy RMBS securities (~75.6% of portfolio). Assumes 55.9% HPI-LTV.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
23Non-Agency Subprime RMBS: 5 Levels of Defense
Lower $817 monthly payment
1 Homeowner Borrower Support from unemployment, stimulus checks, refundable tax credits, forbearance,
loans, etc.
Levels of Protection
55.9% LTV ($150K loan vs. $268k home value)
2 Loan-to-Values
Provides enough asset coverage in event of default/liquidation
Equals Gross WAC – Servicing Fee – Avg. Weighted Bond Coupon
3 Excess Interest
4.6% - 50 bps – 0.86% Avg. Coupon 324 bps excess
4 Deal Subordination Lower tranches in the capital structure will absorb losses first
Purchase discount can provide margin of safety, an important component of total return
5 Discount of Bond Price
Legacy RMBS Portfolio Avg. Current Price = $65.87
Source: Bloomberg and internal. Data as of 6/30/20.
There is no assurance that the Fund will achieve its investment objective, generate positive returns, or avoid losses.
24Q&A with
Diversified securitized products manager with particular focus in Non-Agency Residential Mortgage Backed Securities
Team members average 20 years of experience in securitized products: structured, traded, managed tens of billions worth of deals
Founding partners have worked together for more than 11 years
Year 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Tom Miner
Principal Lehman Brothers Barclays Garrison Point
415-887-1407
tminer@garpc.com Institutional Sales & Trading Securitized Products Principal
Structured Fixed Income Products Portfolio Manager Head Portfolio Manager
University of Utah – MBA, BA & BS
Garrett Smith MBA Lehman
Principal, CEO U.S. Navy (Kellogg) Brothers
Barclays Garrison Point
415-887-1406
gsmith@garpc.com Naval Flight Officer Mortgage Securitized Products Principal
Trader Portfolio Manager Portfolio Manager
Northwestern – MBA, MEM, US Naval Academy - BS Engineering, University of Maryland - BA
Brian Loo, CFA
Managing Director, CIO TCW MetWest TCW Garrison Point
415-887-1409
bloo@garpc.com MBS Analytics RMBS, ABS, Structured Products Structured Products Managing Director
Founding Member, Portfolio Manager Portfolio Manager Portfolio Manager
Carnegie Mellon – MSIA, UCLA – BS (Math/Applied Science)
25Key Definitions
Alpha: A measure of the difference between a fund's actual returns and its expected performance, given its level of risk as measured by beta.
Alt-A: Classification of mortgages with a risk profile falling between prime and subprime. Historically these loans usually have some high risks due to provision factors customized by the lender.
Barclays U.S. Agg. Bond Index is used to represent the U.S. corporate bond market.
Bloomberg Barclays U.S. High Yield index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign
rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
Beta: A measure of a fund's sensitivity to market movements.
C/E (credit enhancement): The improvement of the credit profile of a structured financial transaction or the methods used to improve the credit profiles of such products or transactions. It is a
key part of the securitization transaction in structured finance, and is important for credit rating agencies when rating a securitization. Popular techniques for internal credit enhancement
include subordination/credit tranching, excess spread, overcollateralization, and reserve accounts. (Source reference: “Fixed Income Sectors: Asset-Backed Securities A primer on asset-backed
securities, Dwight Asset Management Company 2005”)
Corporate Bonds: broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Correlation: Statistic that measures the degree to which two securities move in relation to each other.
GSEs, or Government Sponsored Enterprises, are quasi-governmental entities that were established to enhance the flow of credit to specific sectors of the American economy. These agencies,
though privately-held, provide public financial services. The GSEs focused on the housing sector discussed in this presentation are Fannie Mae and Freddie Mac.
High Yield Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is
Ba1/BB+/BB+ or below.
Loan to value (LTV): The ratio of a property's appraised value to the amount of the mortgage.
Modified Duration: Provides a measure of a fund's interest rate sensitivity; the higher the value of a fund's duration, the more sensitive the fund is to shifts in interest rates.
Metropolitan Statistical Area (MSA): geographical region with a relatively high population density at its core and close economic ties throughout the area.
Nonfinancial Corporate Debt refers to the aggregate of debt owed by households, government agencies, non-profit organizations, or any corporation that is not in the financial sector. This can
include loans made to households in the form of mortgages, or amounts owed on credit cards.
Option-Adjusted Spread (OAS) is a measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option.
Prime: Designation of credit score for borrowers who are considered to have very good credit and pose little risk to lenders and creditors.
S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
Standard Deviation: measure of the dispersion of a set of data from its mean; more spread-apart data has a higher deviation. Standard deviation is calculated as the square root of variance. In
finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility.
Subprime: Type of mortgage normally issued by a lending institution to borrowers with low credit ratings. Lending institutions often charge higher interest on subprime mortgages in order to
compensate themselves for carrying more risk.
U.S. 10 Year is a debt obligation issued by the United States government that matures in 10 years.
U.S. GDP measures the final market value of all goods and services produced within a country. It is the most frequently used indicator of economic activity.
U.S. Residential Property Prices is depicted with the Existing One Family Home Sales Median Price which tracks changes in residential property prices.
Vintage: Term used by mortgage-backed securities (MBS) traders and investors to refer to an MBS that is seasoned over some time period. MBSs typically have maturities around 30 years, and
a particular issue's 'vintage' will expose the holder to less prepayment and default risk, although this decreased risk also limits price appreciation
Source: SIFMA Investors Guide to Collateralized Mortgage Obligations, Freddie Mac, Financial Terms Dictionary, Investopedia, Barclays.
26Mutual Fund Risk Terms Defined
Risk
RiskCategory
Category DefinitionExplained
Definition Explained
Borrowing for investment purposes creates leverage, which will exaggerate the effect of any change in the value of securities in the Fund’s portfolio on the Fund’s net
Borrowing Risks and Leverage Risks asset value (“NAV”) and, therefore, may increase the volatility of the Fund. Leverage may cause the Fund to incur additional expenses and magnify the Fund's gains or
losses.
Risk that the Fund could lose money if the issuer or guarantor of a fixed income security, or the counterparty to a derivative
Credit/Counterparty Risk contract, is unable or unwilling to meet its financial obligations. Counterparty risk arises upon entering into borrowing arrangements or derivative transactions and is
the risk from the potential inability of counterparties to meet the terms of their contracts.
CDOs and CLOs are securities backed by an underlying portfolio of debt and loan obligations, respectively. CDOs and CLOs issue classes or “tranches” that vary in risk
and yield and may experience substantial losses due to actual defaults, decrease of market value due to collateral defaults and removal of subordinate tranches,
CLO and Collateralized Debt Obligations Risks market anticipation of defaults and investor aversion to CDO and CLO securities as a class. The risks of investing in CDOs and CLOs depend largely on the tranche
invested in and the type of the underlying debts and loans in the tranche of the CDO or CLO, respectively, in which the Fund invests. CDOs and CLOs also carry risks
including, but not limited to, interest rate risk and credit risk. The use of CLO’s and CDO’s may cause the Fund to experience substantial losses due to defaults.
To the extent the Fund may concentrate its investments in a particular industry or sector; the Fund’s shares may be more volatile and fluctuate more than shares of a
Concentration Risk
fund investing in a broader range of securities.
Risk that foreign (non-U.S.) currencies will decline in value relative to the U.S. dollar and affect the Fund’s investments in foreign (non-U.S.) currencies or in securities
Currency Risk
that trade in, and receive revenues in, or in derivatives that provide exposure to, foreign (non-U.S.) currencies.
Derivatives Risks The Fund’s use of derivatives may increase its costs, reduce the Fund’s returns and/or increase volatility. Derivatives involve significant risks.
The Fund’s distribution policy is not designed to generate, and is not expected to result in, distributions that equal a fixed percentage of the Fund’s current net asset
value per share. Shareholders receiving periodic payments from the Fund may be under the impression that they are receiving net profits. However, all or a portion of
Distribution Policy Risk a distribution may consist of a return of capital (i.e., from your original investment). Shareholders should not assume that the source of a distribution from the Fund is
net profit. Shareholders should note that return of capital will reduce the tax basis of their shares and potentially increase the taxable gain, if any, upon disposition of
their shares.
Risk that the value of equity securities, such as common stocks and preferred stocks, may decline due to general market conditions which are not specifically related
Equity Risk
to a particular company or to factors affecting a particular industry or industries. Equity securities generally have greater price volatility than fixed income securities.
If interest rates rise, repayments of fixed income securities may occur more slowly than anticipated by the market. This may drive the prices of these securities down
Extension Risk
because their interest rates are lower than the current interest rate and they remain outstanding longer.
May be imperfect correlation between the price of a forward contract and the underlying security, index or currency which will increase the volatility of the Income
Forward Contracts Fund. The Income Fund bears the risk of loss of the amount expected to be received under a forward contract in the event of the default or bankruptcy of a
counterparty.
Certain funds are permitted to invest in the Income Fund. As a result, the Income Fund may have large inflows or outflows of cash from time to time. This could have
Fund of Funds adverse effects on the Income Fund’s performance if the Income Fund was required to sell securities or invest cash at times when it otherwise would not do so. This
activity could also accelerate the realization of capital gains and increase the Income Fund’s transaction costs.
27Mutual Fund Risk Terms Defined
Risk Category Definition Explained
High-yield securities (also known as junk bonds) carry a greater degree of risk and are more volatile than investment grade securities and are
considered speculative. High-yield securities may be issued by companies that are restructuring, are smaller and less creditworthy, or are more
highly indebted than other companies. This means that they may have more difficulty making scheduled payments of principal and interest.
High-Yield Securities Risks
Changes in the value of high-yield securities are influenced more by changes in the financial and business position of the issuing company than by
changes in interest rates when 5 compared to investment grade securities. The Fund’s investments in high-yield securities expose it to a
substantial degree of credit risk.
Risk that fixed income securities will decline in value because of an increase in interest rates; a fund with a longer average portfolio duration will be
Interest Rate Risk
more sensitive to changes in interest rates than a fund with a shorter average portfolio duration.
The Fund may, at times, hold illiquid securities, by virtue of the absence of a readily available market for certain of its investments, or because of
Illiquid Securities Risks legal or contractual restrictions on sales. The Fund could lose money if it is unable to dispose of an investment at a time or price that is most
beneficial to the Fund.
Risk that a particular investment may be difficult to purchase or sell and that the Fund may be unable to sell illiquid securities at an advantageous
time or price or achieve its desired level of exposure to a certain sector. Liquidity risk may result from the lack of an active market, reduced number
Liquidity Risk and capacity of traditional market participants to make a market in fixed income securities, and may be magnified in a rising interest rate
environment or other circumstances where investor redemptions from fixed income mutual funds may be higher than normal, causing increased
supply in the market due to selling activity.
The risk that the value of securities owned by the Fund may go up or down, sometimes rapidly or unpredictably, due to factors affecting securities
Market Risk and Security Selection Risk markets generally or particular industries. The risk that the value of securities owned by the Fund may go up or down, sometimes rapidly or
unpredictably, due to factors affecting securities markets generally or particular industries.
Mortgage-backed and other asset-backed securities are subject to the risks of traditional fixed-income instruments. However, they are also subject
to prepayment risk and extension risk, meaning that if interest rates fall, the underlying debt may be repaid ahead of schedule, reducing the value
of the Fund’s investments and if interest rates rise, there may be fewer prepayments, which would cause the average bond maturity to rise,
increasing the potential for the Fund to lose money. Certain mortgage-backed securities may be secured by pools of mortgages on single-family,
multi-family properties, as well as commercial properties. Similarly, asset-backed securities may be secured by pools of loans, such as corporate
loans, student loans, automobile loans and credit card receivables. The credit risk on such securities is affected by homeowners or borrowers
Mortgage-Backed and Asset-Backed Securities Risks
defaulting on their loans. The values of assets underlying mortgage-backed and asset-backed securities, including CLOs, may decline and therefore
may not be adequate to cover underlying investors. Some mortgage-backed and asset-backed securities have experienced extraordinary weakness
and volatility in recent years. Possible legislation in the area of residential mortgages, credit cards, corporate loans and other loans that may
collateralize the securities in which the Fund may invest could negatively impact the value of the Fund’s investments. To the extent the Fund
focuses its investments in particular types of mortgage backed or asset-backed securities, including CLOs, the Fund may be more susceptible to risk
factors affecting such types of securities.
28Mutual Fund Risk Terms Defined
Risk Category Definition Explained
The issuers of securities held by the Income Fund may be able to prepay principal due on the securities, particularly during periods of declining
Prepayment interest rates. Securities subject to prepayment risk generally offer less potential for gains when interest rates decline, and may offer a greater
potential for loss when interest rates rise.
Price volatility risk Risk that the value of the Fund's investmetn portfolio will change as the prices of its investments go up or down.
Ratings are not an absolute standard of quality, but rather general indicators that reflect only the view of the originating rating agencies from which
an explanation of the significance of such ratings may be obtained. There is no assurance that a particular rating will continue for any given period
Rating Agencies Risks of time or that any such rating will not be revised downward or withdrawn entirely. Such changes may negatively affect the liquidity or market price
of the securities in which the Fund invests. The ratings of securitized assets may not adequately reflect the credit risk of those assets due to their
structure.
The fund may experience heavy redemptions that could cause the fund to liquidate its assets at inopportune times or at a loss or depressed value,
Redemption risk.
which could cause the value of your investment to decline.
U.S. Government securities are not guaranteed against price movement and may decrease in value. Some U.S. Government securities are
supported by the full faith and credit of the U.S. Treasury, while others may be supported only by the discretionary authority of the U.S. government
U.S. Government Securities Risks to purchase certain obligations of a federal agency or U.S. government sponsored enterprise (“GSE”) or only by the right of the issuer to borrow from
the U.S. Treasury. While the U.S. government provides financial support to such agencies and GSEs, no assurance can be given that the U.S.
government will always do so.
29Talking Points
Slide 2: Self-explanatory. Read title, bullet point, and many of the performance numbers on the page.
Slide 3: Read out many of the numbers on the page including the summary above the graph. Self-explanatory performance graph.
Slide 4: Self-explanatory performance slide.
Slide 5: Highlight the historic fund outflows across the entire bond universe from early March to early April of 2020.
Slide 6: Highlight the non-agency RMBS daily trade volumes for March and the spike on 3/25 and generally high total volume of trades between 3/15 and 4/15.
Slide 7: Read out numbers on the page and bullet points. Highlight that the legacy RMBS market is shrinking after it peaked in 2007 at ~$2.1 trillion.
Slide 8: Self-explanatory. Title describes purpose of page. Yields across fixed income (high yield, investment grade corporate, Barclays aggregate) are low relative to history over the past 10 years.
Slide 9: Self-explanatory. Highlight the increase in Agg duration and the decrease in Agg yield to worst.
Slide 10: Read through bullet points on page that describe both bear and bull case signals in the mortgage market.
Slide 11: Title and accompanying bullet point describes the page. Mortgage delinquencies in the legacy RMBS space have ticked up slightly in the last quarter.
Slide 12: Median home price growth has steadily increased for the last 5 years and projections through mid-2021 are ambiguous.
Slide 13: In the last four years homeownership rate has picked up as the number of US households and the overall population continues to increase.
Slide 14: Title and bullet point describe the page. There are less homes being built in the lowered tiered home price in 2020 than there were in 2005.
Slide 15: For the last four years US existing homes new listings and purchase mortgage applications have moved in tandem but recently they began to separate as demand in housing increases and supply
decreases.
Slide 16: Title and bullet point describes the page. Both new and existing homes are near their most affordable time since 1975.
Slide 17: See title, assumptions, and two different time period scenarios (November 2018 and June 2020). Highlight the drop in the 30-year fixed rate Fannie Mae Commitment Rates and how that would
affect monthly payment on a $160K mortgage.
Slide 18: Compare 1-month voluntary prepayment rates between Fannie Mae 4% and our current portfolio.
Slide 19: Read through the bullet points and the five levels of protections in the legacy non-agency subprime RMBS space.
Slide 20: Title and bullet points describe page. Graph on the left demonstrates a hypothetical scenario to arrive at excess interest calculations from Gross WAC, Net WAC, and Avg. Coupon.
Slide 21: While corporate securities prices dropped rapidly in March, highlight the rebound since then, both in treasuries and corporates, due to the magnitude of unprecedented government stimulus.
Slide 22: Read out numbers on the page and bullet points. Accompanying bullet points are self-explanatory.
Slide 23: See accompanying bullet points which describes each chart on the page. Over 223k residential home loans back the fund’s predominantly floating rate portfolio. The fund is currently $2.85 billion
in assets under management. Fundamentals of collateral continue to improve each year as denoted by improving trends in 90+ day delinquencies and HPI-LTVs.
Slide 24: Read through the bullet points and the five levels of protections in the legacy non-agency subprime RMBS space.
Slide 25: Self-explanatory, see bullet points and graph.
Slide 27 to 29: Highlight Concentration Risk, Interest Rate Risk, Liquidity Risk, and Market Risk and Security Selection Risk. These risks include the possibility that concentrated Fund’s shares may be more
volatile and fluctuate more than shares of a fund investing in a broader range of securities, Fixed income securities will decline in value because of an increase in interest rates, a particular investment may
be difficult to purchase or sell and the Fund may be unable to sell illiquid securities at an advantageous time or price due to various factors, and that the value of securities owned by the Fund may fluctuate
due to factors affecting securities markets generally or particular industries. For further detail on these and other risks associated with this Fund, please refer to “Mutual Fund Risks Term Defined”.
30Important Risk Information
Investors should carefully consider the investment objectives, risks, charges and expenses of the AlphaCentric Funds. This and other
important information about the Fund is contained in the prospectus, which can be obtained by calling 844-ACFUNDS (844-223-8637)
or at www.AlphaCentricFunds.com. The prospectus should be read carefully before investing. The AlphaCentric Funds are distributed
by Northern Lights Distributors, LLC, member FINRA/SIPC. AlphaCentric Advisors LLC, Garrison Point Capital, LLC and Garrison Point
Funds, LLC are not affiliated with Northern Lights Distributors, LLC. Any reproduction or distribution of this presentation, as a whole or
in part, or the disclosure of the contents hereof, is prohibited.
Investing in the Fund carries certain risks. The value of the Fund may decrease in response to the activities and financial prospects of an individual security in
the Fund’s portfolio. The Fund is non-diversified and may invest a greater percentage of its assets in a particular issue and may own fewer securities than
other mutual funds; the Fund is subject to concentration risk. Credit risk is the risk that the issuer of a security will not be able to make principal and interest
payments when due. The use of derivatives and futures involves risks different from, or possibly greater than, the risk associated with investing directly in
securities. Fixed income securities will fluctuate with changes in interest rates. Lower-quality bonds, known as "high yield" or "junk" bonds, present greater
risk than bonds of higher quality. The performance of the Fund may be subject to substantial short term changes. There are risks associated with the sale and
purchase of call and put options. These factors may affect the value of your investment.
4788-NLD-7/27/2020
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