Should you consider investing in the Federal National Mortgage Association (FNMA)?

Third avenue management, an investment management firm, has published its letter to investors “Real Estate Value Fund” for the second quarter of 2021 – a copy of which can be found downloaded here. A portfolio return of + 17.71% was recorded by the fund for the second half of 2021, below the FTSE EPRA NAREIT Developed index which generated gains of 16.11% for the same period. You can check out the top 5 holdings of the fund to get an idea of ​​their top bets for 2021.

In Third Avenue Management’s Q2 2021 letter to investors, the fund mentioned the Federal National Mortgage Association (NYSE: FNMA) and discussed his position on the company. The Federal National Mortgage Association is a Washington, DC-based mortgage company that currently has a market capitalization of $ 1.5 billion. FNMA has returned -45.61% year-to-date, while its 12-month returns are down -35.00%. The stock closed at $ 1.30 per share on July 22, 2021.

Here’s what Third Avenue Management has to say about the Federal National Mortgage Association in its Q2 2021 letter to investors:

“The Fund has also adjusted its stake in the Federal National Mortgage Association (“Fannie Mae”) during the period. As indicated in previous letters to shareholders, the Fund took a position in the preferred and common stocks of Fannie Mae in 2020. The management of the Fund believed that this company (together with the Federal Home Loan Mortgage Corporation or “Freddie Mac” and collectively the Government Sponsored Entities (or “GSEs”) were (i) a critical source of funding for sustainable home ownership and affordable rental housing in the United States, (ii) among the world’s most profitable real estate companies in terms of operating profits, and (iii) had securities traded at fractions of their underlying value due to the fact that GSEs had been operating under trusteeship since 2008.

In addition, the management of the Fund was of the opinion that the GSEs would eventually break out of this framework while further replenishing capital, as indicated in the strategic plan of the Federal Housing Finance Agency (“FHFA”) – a process which could be accelerated once court rulings take into account the controversial changes to its Preferred Share Purchase Agreement (ie the “NetWorth Sweep”). However, given the significant “process risk” associated with such a significant repositioning, the Fund would limit the amount of capital invested in the entities despite an unrivaled value for money proposition.

During the quarter, the United States Supreme Court (“SCOTUS”) issued orders relating to two of the pending court challenges. In Collins v. Yellen, SCOTUS upheld the plaintiffs’ claims that the guardianship was unconstitutionally structured, referred the case to the Fifth Circuit of Appeal for a potential ‘retroactive appeal’, but declined to consider the full value sweep net zero through this particular constitutional law. claim. While this order did not provide an outright remedy, other challenges relating to the “implied commitment of good faith and fair dealing” and a “claim relating to the taking, illegal exaction and breach of an implied contract ”remain pending in district and federal courts. Court of Claims, respectively. These cases have resulted in significant discoveries and will progress through the remainder of 2021.

Despite a longer delay, the management of the Fund continues to believe that administrative action would be the most prudent course of action. In other words, the recapitalization of entities and their release as quasi-utilities with improved capital ratios enables key objectives to be achieved. This mainly includes (i) moving the US taxpayer out of the “first loss position” for the $ 6.5 trillion in mortgage guaranteed by the entities, (ii) providing more stability and capital for companies to continue their mission. promotion of affordable housing, and (iii) respect property rights while preserving value for GSE stakeholders (including the US Treasury).

One such plan was recently published in the Brookings Institute Report: Government Sponsored Enterprises at the Crossroads. It is also an issue that has been carefully assessed by the Congressional Budget Office (CBO) in its effects of recapitalizing Fannie Mae and Freddie Mac through administrative actions. As noted in this analysis, “the CBO model incorporates the judgment that in scenarios where the sale of GSE common stock did not raise sufficient funds to redeem the full face value of the senior and junior preferred stock, the Treasury would take a write-down in the value of its senior preferred stake before requiring junior preferred shareholders to do so.

Taking all these into account, as well as price anomalies in capital structures, the Fund’s remaining investment in GSEs is now focused exclusively on preferred shares. At quarter end, these holdings represented approximately 2.0% of the Fund’s capital and securities traded at prices that represent less than 10% of their liquidation preference (eg, “face value”). Meanwhile, the entities remain fairly profitable and replenish significant capital while the issues are resolved. “

Photo by DocuSign on Unsplash

Based on our calculations, the Federal National Mortgage Association (NYSE: FNMA) was unable to secure a spot on our list of 30 most popular stocks among hedge funds. The FNMA was in 4 hedge fund portfolios at the end of the first quarter of 2021. The Federal National Mortgage Association (NYSE: FNMA) has generated a return of -46.50% in the past 3 months.

The reputation of hedge funds as savvy investors has been tarnished over the past decade, as their hedged returns could not keep up with the unhedged returns of stock indices. Our research has shown that small cap hedge fund stock selection managed to beat the market by double digits every year between 1999 and 2016, but the margin for outperformance has shrunk in recent years. Nonetheless, we were still able to identify in advance a select group of hedge funds that have outperformed S&P 500 ETFs by 115 percentage points since March 2017 (see details here). We were also able to identify in advance a select group of hedge funds that underperformed the market by 10 percentage points per year between 2006 and 2017. Interestingly, the margin of underperformance of these stocks has increased in recent years. Investors who are long in the market and short on these stocks would have reported more than 27% per year between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next big investing idea. For example, the pet market is growing at an annual rate of 7% and is expected to reach $ 110 billion in 2021. So we look at the 5 best stocks for animal lovers. We go through lists like the 10 best battery stocks to choose the next Tesla which will offer a 10x return. Even though we only recommend positions in a tiny fraction of the companies we analyze, we check as many stocks as possible. We read letters from hedge fund investors and listen to equity pitches at hedge fund conferences. You can subscribe to our free daily newsletter at our home page.

Disclosure: none. This article was originally published on Monkey initiate.

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