Thornburg Mortgage
As a value investor, I’m always looking for ways to exploit opportunities presented by other’s fear and greed.
Obviously, the major current fear concerns any company in the housing sector. In particular, mortgage companies are feeling the brunt of the pessimism.
I thought I found a good candidate in Thornburg Mortgage (Ticker: TMA), but before I could do the necessary research, the price of TMA recovered enough for me lose most of my interest.
Before I lost interest I found some juicy tidbits — more fun than any investment opportunity.
While most people thought they were buying a safe Real Estate Investment Trust (REIT) they were in fact purchasing something more like a hedge fund. Or, at least incurring the fees of a hedge fund.
Thornburg Mortgage is managed by a separate company. The management company has has a sweetheart contract. It boils down to a hedge fund management contract for managing a very leveraged mortgage REIT. The management fees are 1% of assets and 20% of profits (above LT treasuries +1%) — a hedge fund fee structure — plus expenses, plus long-term incentive compensation.
To say this is a sweetheart contract understates the contract. To increase fees, all they have to do is keep issuing shares — which they do on a quarterly basis, diluting current investors.
While the company still sells below book value, go into any investment with your eyes wide open. You would be paying hedge-fund fees, you should expect the same performance.
