Perot Investments is looking to buy floating-rate credit cards for its $1.7 billion short-term liquidity portfolio. The hedge fund, which also manages the assets of billionaire financier and former presidential candidate Ross Perot, is looking to park cash in conservative assets amid the Federal Reserve's continued raising of interest rates. "We're going for a safe asset class and credit card floaters seem to offer that framework," said Bonnie Mitra, fund manager in Plano, Texas. He noted while spreads on these securities are in the LIBOR-flat area, the bonds are well protected structurally and the collateral backing them has performed well. "Credit card cash flows are predictable. I certainly don't, but a lot of people borrow at 17-18% on those cards," he said.
The fund is also scouring for floating-rate commercial mortgage-backed securities but Mitra said he is concerned about the broader real estate market. "You have to be so careful on what the collateral is," he said, referring to bonds backed by real estate exposure. But he finds credit cards more attractive because there is less concentration of risk among the underlying obligors. "I like the credit card deals because the collateral is dispersed among millions of credit card holders. If you buy short-dated securities, you have a reasonable comfort level," he noted.
And overall, Mitra prefers floaters because, despite evidence of a slowing economy, he expected the Fed will continue to raise the Fed Funds rate this year until it reaches 4%. It was at 3% last Tuesday. "There are five meetings between now and December," he said before last week's meeting, reasoning it is likely the Fed will raise rates at four of those meetings by 25bps a pop.
The liquidity fund is run on an absolute basis and has freedom to invest in the full gamut of structured securities, including riskier assets such as home equities, manufactured housing and collateralized debt obligations. Yet as a liquidity fund, it tends to pick safer assets.