Best Early-Stage Investment Fund (Since Inception): Timberline Fund, LP
The fund, managed by Wynkoop LLC, is managed to generate the best possible risk-adjusted returns with muted volatility and little correlation to the equity markets. We speak to Founder Brandon Jundt about how the fund achieves this bold aim.
Established in 2009, Wynkoop LLC is dedicated to investing in distressed non-agency mortgaged-backed securities (MBS).
After a number of locked-up funds, we launched Timberline Fund LP in April 2011 and continue to invest in MBS and some real estate whole loans. Timberline Fund is open to accredited investors and has had investments primarily from high-net worth individuals, and some from family offices, endowments and institutional investors.
Timberline doesn’t attempt to beat the S&P 500 or make 10% per year; it attempts to generate the best risk-adjusted returns available. We are fundamental investors and spend our days analysing housing and mortgage markets, in addition to individual MBS positions. There are many tens of thousands of unique mortgage bonds, but only a small fraction of the number of investors and analysts as in the equity markets, allowing for genuine value-add analysis, even by smaller firms.
The huge diversity in bond profiles allows us to fine-tune the portfolio and naturally hedge interest rate risk and credit risk. Starting in 1999 I worked at CoBiz Financial, which is a regional bank, where I modelled and hedged the bank’s interest rate risk and those lessons have stuck with me. We believe that cash is an asset class too, and at times maintain large cash balances. That creates drag on the returns, but is often worth it to preserve dry powder. MBS can sell-off in sympathy with other markets and we’ve maintained a conservative portfolio for some time because there are a lot of scary things going on out there.
Stocks aren’t a bubble, but they aren’t cheap either and S&P revenues and net income are down year over year. Many sovereigns face crippling debt levels, ugly age demographics, and it isn’t written in stone that the EU has to stay together forever. Escalating violence in the Middle East could spiral and the larger economies there are printing amazing deficits with lower oil prices. Japan and Canada are in actual recessions are most other countries are barely growing. Any of these things could lead to a general risk-off trade. Moving forward we see a lot of reasons to stay focused on risk and not swing for the fences today.
Separately from Timberline, Wynkoop has also bought about 800 single-family rental homes in Phoenix and Orlando since 2011. After selling several hundred homes, that business is currently $45mn in assets with a new rental home fund coming online now that will add another $25mn or so.
This strategy has served the firm well as we have been financially stable for a number of years. Wynkoop came into business with an $11mn fund in May 2009, which lead to a series of locked-up funds which totalled about $50mn by early 2011. Timberline Fund was launched as an ongoing hedge fund with $6mn in equity in April 2011 and has grown to $60mn today. The rental home funds add another $45mn in assets for the firm. To this point, the firm has only raised capital by word of mouth.
Ultimately we believe that the success we have achieved in the MBS markets is driven by two overriding principals.
First you need to step away from the screens and models and understand what is happening in the housing market and economy. MBS analysts are prone to overreliance on complex models and missing the forest for the trees. For instance, we talk to homebuilders constantly to get a real-time sense of the market and also their building costs. Home prices are driven by population growth and the cost to build new homes, not supposed measures like inventory and months supply, which measure how much people want to move as much as anything else. Since 2009 the US has built 5.4 million homes and lost about 2.0 million to floods, fires and the like. The net addition of 3.4 million homes compares to population growth of 16.5 million people over that time. The cost to build new homes isn’t getting any cheaper and people have to live someplace. Non-agency MBS spreads remain very attractive, unless you think we’re in another housing bubble. If that’s the case, where are all these people going to live? Getting those big things correct is far more important than calculating an option-adjusted spread to the nearest tenth of a basis point on an array of supercomputers.
Secondly, you need to have a thorough understanding of the bonds’ structures, which are varied and can be complex and unusual. Wynkoop’s two portfolio managers have both been in the business since MBS securitization was in its infancy and have a thorough understanding of the structures because we were investing in the space when they were being developed.
Going forward there are a number of exciting developments for our firm which will provide us with new challenges. Our rental home business is not a permanent one and will be wound down in a few years. That will free up bandwidth for that side of the office, but we will likely continue investing in real estate in another form, allowing us to gain new experience in the market.