Prudential Financial Inc.’s portfolio manager Mike Collins started selling agency MBS in 2009 and replacing them with non- agency ones as well as CMBS and eventually collateralized loan obligations. The $8.5 billion Prudential Total Return Bond Fund has attracted an estimated $4.6 billion in investor money since September, according to Morningstar. It returned 5.3 percent over the past year, putting it ahead of 94 percent of rivals.
With lending standards relaxing, home prices appreciating and the labor market improving, agency mortgages aren’t poised to perform that well, he said.
“We hold hardly any traditional Fannie-Freddie agency MBS in our portfolio,” Collins said. “At our size, we can still take advantage of much higher return opportunities.”
Pimco’s Mather isn’t giving up on mortgage bonds and sees the potential for returns even in a volatile 2015.
“We expect many active alpha opportunities in the mortgage space,” he said.