American Capital Agency Corp. (AGNC), Capstead Mortgage Corporation (CMO): Internal Activism will Help Anworth Mortgage Asset Corporation (ANH) in the Future

Now let’s look at Capstead Mortgage Corporation (NYSE:CMO), an Agency-only mREIT with exclusive investments in the adjustable-rate securities. These securities provide an automatic cushion to book value erosion in times of climbing interest rates and offer additional returns as the yields adjust to more current rates. As a result, the management at Capstead and other mREITs that have large exposures in adjustable-rate securities don’t need internal activism.

Because of the composition and structure of the asset portfolio, Capstead Mortgage Corporation (NYSE:CMO) reported a 5.9% sequential decline in its book value. The future for Capstead holds twin benefits, one in the shape of higher income and the other in providing a book value cushion. If rates continue to climb, the adjustable-rate mortgage-backed securities held by Capstead will adjust to more current rates and yield higher; this will cause income to increase. At the same time, they are less sensitive to changes in interest rates overall.

Conclusion

I believe that the current situation demands that the management teams at  mREITs show some internal activism if they are to be considered solid investments. Even though Anworth Mortgage Asset Corporation (NYSE:ANH) beat its bottom line estimate, it was not an actual outperformance. Its management failed to rebalance its portfolio to better suit the environment. On the other hand, the management at American Capital Agency Corp. (NASDAQ:AGNC) remained active which is why it was able to cap book value erosion. Capstead Mortgage Corporation (NYSE:CMO) also presents an excellent investment opportunity even under rising interest rates because of its adjustable-rate securities.

The article Internal Activism will Help Anworth in the Future originally appeared on Fool.com and is written by Adnan Khan.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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