Author: Micah Weinstein

DoubleLine Total Return Bond Fund Commentary – Q4 2021

Thesis

DBLTX (yielding 3.24%) utilizes a top-down, bottom-up process that focuses on MBS and Agency bonds. When compared to the benchmark (Barclays U.S. AGG), the holdings have lower duration and exposure to corporate bonds, reducing their sensitivity to interest rate movements and credit spreads. We expect attractive risk-adjusted return characteristics over the long term from DBLTX, especially during periods when corporate bonds’ spread increase and the yield curve steepens.

 

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Overview

In the fourth quarter of 2021, DBLTX outperformed the benchmark (Barclays U.S. AGG) by 19bps, largely due to the fund’s shorter duration – Fed monetary policy expectations caused the curve to begin to flatten: 2-year rates began to rise, and 30-year rates slightly dropped. A strong housing market and floating-rate coupons contributed to performance, though.

 

Q4 2021 Summary

• DBLTX returned (0.18%), while the U.S. AGG returned 0.01%
• Quarter-end effective duration for DBLTX was 4.82 and 6.60 for the U.S. AGG
• Top performing sectors included non-Agency residential mortgage-backed securities and CLOs
• Worst performing sectors included non-Agency commercial mortgage-backed securities, asset-backed securities, and Agency MBS

 

 

 

 

 

 

 

 

 

2021 Performance Comparison

 

[Category Mutual Fund Commentary]

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

MetWest Total Return Bond Fund Commentary – Q4 2021

Thesis

MWTIX (yielding 1.34%) is an actively managed fund that provides a sector-based strategy while still maintaining fundamental research driven through issue selection. When compared to the benchmark (Barclays U.S. AGG), the holdings have similar duration and exposure, yet selection is focused around areas where other managers are not looking. Through sector rotation and active weighting, we expect MWTIX to generate alpha over time.

 

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Overview

In the fourth quarter of 2021, MWTIX slightly underperformed the benchmark (Barclays U.S. AGG) by 8bps which was mainly caused by poor selection in corporate credit. Duration positioning (underweight to the long end of the curve) also acted as a headwind. Yet, the fund did see some positive performance due to its underweight to corporate credit and strong selection in the RMBS (including agency MBS TBAs and legacy non-agency MBS) space.

 

Q4 2021 Summary

• MWTIX returned (0.09%), while the U.S. AGG returned 0.01%
• Quarter-end effective duration for MWTIX was 6.32 and 6.6 for the U.S. AGG
• Top performing sectors included Industrials, Health Care, midstream companies, finance and life insurance names, and RMBS holdings
• Top detractors included RMBS and agency MBS holdings

 

 

 

 

 

 

 

2021 Performance Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Category Mutual Fund Commentary]

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Touchstone Impact Bond Fund Commentary – Q4 2021

Thesis

TCPNX (yielding 1.79%) is a smaller fund that does not have as many assets under management compared to our other core mangers, enabling them to make more nimble and tactical decisions. By making small allocations to undervalued “riskier” asset classes (high-yield and non-dollar denominated debt), TCPNX diversifies our fixed income portfolio and generates superior returns to the benchmark (Barclays U.S. AGG). We like that the fund utilizes a bottom-up investment process through proprietary framework analysis, fundamental security review, and portfolio risk management.

 

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Overview

In the fourth quarter of 2021, TCPNX underperformed the benchmark (Barclays U.S. AGG) by 10bps primarily due to the overweight in spread products, which saw widening during the quarter. An underweight to Treasuries, which saw strong performance, also detracted from returns. As for duration, the fund continues to have a neutral approach which had minimal to no effect on performance.

 

Q4 2021 Summary

• TCPNX returned (0.11%), while the U.S. AGG returned 0.01%
• Quarter-end effective duration for TCPNX was 6.3 and 6.6 for the U.S. AGG
• Three largest contributors
• Build America Bonds, U.S. Treasuries, and U.S. Small Business Administration (SBA) securities
• Three largest detractors
• Exposure to banks, insurance companies, and Ginnie Mae Project Loans (ie. CMBS)

 

 

 

 

 

 

 

2021 Performance Comparison

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Category Mutual Fund Commentary]

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Western Asset Core Bond Fund Commentary – Q4 2021

Thesis

WATFX (yielding 1.72%) is an actively managed fund that finds overlooked areas of the market that can go against consensus views and add value. Through internal macro, credit, and fundamental research WATFX identifies undervalued securities and takes on more credit exposure to generate alpha over time. Through a diversified approach to interest rate duration, yield curve, sector allocation, and security selection, the fund dampens exposure to volatility.

 

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Overview

In the fourth quarter of 2021, WATFX underperformed the benchmark (Barclays U.S. AGG) by 17bps largely due to the fund’s longer duration and exposure to EM debt. The news of the Omicron variant caused risk assets to weaken at first, but they soon rebounded upon news that this variant would cause less sever symptoms compared to past variants. Inflation continued to increase which caused the FOMC to consider increasing the pace and amount of tapering needed to combat a possible longer than expected increase in prices. The fund continues to position itself to benefit from a global recovery but may see volatile times for now.

 

Q4 2021 Summary

• WATFX returned (0.16%), while the U.S. AGG returned 0.01%
• Quarter-end effective duration for WATFX was 7.5 and 6.6 for the U.S. AGG
• Added exposure to short-term yields and trimmed intermediate to long-term yields
• Sold out of remaining TIPS exposure
• Increased allocation to investment-grade credit
• Continued to trim agency MBS exposure, furthering its underweight relative to the benchmark

 

 

 

 

 

 

 

2021 Return Comparison

 

 

[Category Mutual Fund Commentary]

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

Hello,

 

Please see write-up on BKI for Q4 2021 provided below. I have been working with Sarah (and Julie) on some of the quarterly updates. If there are any questions please feel free to reach out to us. Thanks!

 

 

 

Current Price: $56.24	Price Target: $80 (down from $96)
Position Size: 1.52%	TTM Performance: -32.38%

 Key Takeaways: 

• Beat estimates: similar to the previous quarters in FY21, they beat estimates on strong new customer adds and cross-selling progress aided by their recent acquisition, Optimal Blue. “From a sales perspective, 2021 was a record year and the fourth quarter was the highest of the year.”
• Optimal Blue: an agreement with Cannae Holdings and Thomas H. Lee Partners has been reached in which Black Knight will be acquiring the remaining interest, to own 100% of Optimal Blue.
• Management promotions: announced that Joe Nackashi (35-years with BKI and President as of 2017) has been appointed CEO. Kirk Larsen (joined as CFO in 2014) has also been appointed President and CFO. Anthony Jabbour, previous CEO, will be chairman and will continue to act as CEO of DNB.
• Continued growth through strong acquisitions: the company continues to expand their capabilities in automation and cost reduction through acquisitions like Surefire. “We’re also developing new capability for the recently acquired Surefire marketing automation platform that was originally built to serve the origination market to help service and provide better customer service and reduce call volume.”
• Positive sales and client outlook: in FY21 they were able to grow their customer base and are expecting to see stronger growth going forward. “Based on our strong pipeline and sales momentum, we expect to sign more clients in 2022 than we did last year.”

 Additional Highlights:

• Seeing robust organic growth, ahead of LT targets: For the quarter, revenues increased 13%; organic revenue growth of 11%. As for the year, revenues increased 19%; organic revenue growth of 10%.
• Guidance in line w/ LT targets: Anticipating FY22 revenue growth of 8-9% on organic revenue growth of 7-8%. 

• Tailwind from higher foreclosure volumes (~$30m).
• Headwind from lower origination volumes (~$30m).
• Cost headwinds as operating environment is reaching a more “normal” level: Expecting an approximately $12m increase in expenses over FY21 levels. “On the expense side, we’re expecting increases in sales and marketing and travel and entertainment expenses as a result of a return to a more normal operating environment and higher personnel expenses and wage inflation above our typical annual increases.”
• Margins (EBITDA) may see a short-term decline in 2022: Anticipating EBITDA margin to slightly decline in Q1 2022 compared to Q4 2021 due to normal seasonality, but expect this to quickly turn around in the following quarters.

• Limited impact from higher rates/end of refinancing boom:

• Interest rates drive mortgage volumes but BKI revs are more tied to loans outstanding than the cyclicality of volumes.
• Revenues tied to origination volumes are a relatively modest percentage of total revenue (sub-10%… or  ~18%  of  origination  revenues  and  26%  of  data  & analytics).
• The rest of their revenue is recurring (>90%) with 5-7  year contracts and price escalators (adds ~1.5% to top line annually).

• Focus on innovation and integrated offerings: their strategy is to continue to deliver innovation and selectively pursue acquisitions to further strengthen their end-to-end offerings across the mortgage life cycle.

• Example of new innovation: earlier this year they launched their underwriter assist solution, which uses AI enhanced automation to review loan package documents more efficiently, reducing the overall cost by reducing manual review time and supporting effective decision-making by underwriters.
• Example of a strengthening acquisition: the purchase of Surefire will help reduce call volume and customer servicing by sharing explanatory and personalized videos for Servicing Digital (ie. escrow statement flow, private mortgage insurance, refi benefits, etc…).

Data & Analytics segment (~15% of revenue) Q4 revenues were up 11% and FY21 revenues were up 13%. Driven by strong sales execution and revenue from new innovative solutions.

• Organic revenue growth of 8%; 220bps of operating margin expansion.
• Anticipating negative revenue growth of a few percent due to origination volume headwinds and the removal of two data deals at lower annual rates.
• Trending ahead of LT targets in recent quarters on strong cross-sales related to new client deals, as well as renewals.
• Current situation is highlighting their unique data sets and analytics. They are the only company with real-time visibility into the majority of active mortgage loans in the US.

Software Solutions segment (~85% of revenue) Q4 revenues were up 13% and FY21 revenues were up 20%.

• Organic growth of 11%; 130bps of operating margin contraction.
• Expecting low double-digit revenue growth in FY22.
• Servicing (low-60’s% of revenue) revenues up 7%

• Growth driven by higher usage based revenues on MSP (Mortgage Servicing Platform), new innovative solutions, and new clients.
• Expecting high-single digit revenue growth in FY22.

• Originations (~20% of total revs) – made up of new loans, refi’s and HE– revenues up 28% (organic revenues up 20%)

• Growth driven by Optimal Blue acquisition and new clients.
• Expecting mid-teens revenue growth in FY22.
• Strategy is to create a comprehensive end-to-end solution to digitize the origination process and increase efficiency through automation and AI to reduce the costs to originate a loan.

Valuation:

• “bought back $100 million of shares in recognition of strong cash flow and our stock trading at levels that we believe is meaningfully below its intrinsic value.”
•  Trading at >4% FCF yield on 2022 –valuation has gotten less expensive more recently and is supported by growth potential, strong ROIC with a recurring, predictable revenue model (>90% recurring revenue) and high FCF margins, which is aided by high incremental margins and capex which should taper as they grow.
• They should see high-single-digit top line growth and margin expansion in both segments – LT mgmt. goal of 50-100bps total per year – that, combined w/ modest share buybacks, should drive low-double-digit FCF/share growth.
• Net leverage ratio dropped to 3.2x
• Capital allocation priorities include debt pay down, opportunistic share repurchases and acquisitions.

Thesis:

• Black Knight is an industry leader with leading market share of the mortgage servicing industry. 
• Digitization of real estate transactions is still in early stages
• Stable business with >90% recurring revenues, long-term contracts and high switching costs.
• BKI has high returns on capital and high cash flow margins.

 

Sarah Kanwal

Equity Analyst, Director

 

Direct: 617.226.0022

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

 

 

Micah Weinstein

Research Analyst

 

Direct: 617.226.0032

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com