"Bend but don't break" means trying to focus on positions where there may be some price fluctuations in volatile markets but where there is unlikely to be a long-term permanent impairment of capital.
One of those sub-sectors has been non-agency mortgage-backed securities (NAMBSs). These are bonds that are backed by residential loans but not guaranteed by the government. As an investor, you're depending on the cash flow from the underlying loans to pay you back.
We have specifically been investing in legacy NAMBSs that were issued before the global financial crisis. The underlying borrowers here have benefited from more than a decade of house-price appreciation, and the loan to valuation on many of these is now less than 50%.
So even if you have a downturn in the housing market, you still expect to get positive yields on a hold-to-maturity basis.
Asset coverage and seniority
Our bend-but-don't-break philosophy means that effectively we want bonds with a lot of asset coverage and with seniority in the capital structure. That means we can withstand a lot of asset volatility.
A lot of the mortgages and other structured products and assets that we have are well protected from a default perspective, as they have 40, 50, 60 percentage points of asset coverage and low loan-to-value ratios.
So even if you have some economic volatility, even if prices fall from here, you're so far in the money that you don't have to worry about that credit component.
For more on the "bend but don't break" approach and opportunities in fixed income, read our exclusive guide.