Where deep modelling meets mortgage credit

Greg Valli has been with Ellington Management Group for two out of the three decades it has been in operation. During this time, the firm has seen significant growth, now managing over $24 billion in structured credit and mortgage assets. Valli explains that the investment universe has expanded beyond just agency mortgage prepayment strategies, now encompassing daily liquid, lower-risk funds, drawdown funds, and permanent capital vehicles.

Despite navigating several market downturns, including the GFC and COVID, Ellington has maintained significant returns. Valli highlights a significant shift in the market, where it moved from being essentially all investment grade to being entirely below investment grade. This transition has emphasized the importance of deep modelling and forensic research.

Due diligence remains a central aspect of the investment process, as Valli constantly hones his understanding of exactly what is being purchased and considers various scenarios. For instance, Valli's firm runs 500 different interest-rate paths and layers in different assumptions around prepayments and credit performance, crucial in informing sizing and positioning.

Valli sees prescient investment opportunities in the lower-risk end of the spectrum, where spreads have tightened. He also identifies attractive opportunities in mortgages and structured credit. Ellington's portfolio is agile, not built for a specific outcome or attempting to predict interest rate direction. This flexibility, coupled with the complexity of the sector, is one of Ellington's defining features.

Valli is bullish on the sector and Ellington's ability to navigate it and generate returns, citing the favorable US housing backdrop and several tailwinds.