Evergreen Investments is looking to add 5-10%, or up to $55 million, to its commercial mortgage-backed securities allocation. David Fowley, portfolio manager of $2.3 billion in taxable fixed-income, including the $550 million Evergreen limited duration fund, says he will look for securities with a two to three year duration that yield over 100 basis points more than 5-year Treasuries. Evergreen will sell two-year Treasuries to raise money for the purchase. Fowley sees the CMBS sector as a way to pick up decent yield without incurring the extreme credit risk associated with beaten up corporate names.
Examples of recent CMBS purchases Evergreen has made are Bank of America notes with a 2.5 yr avg life that trade at 112 basis points over five-year Treasuries, and Residential Funding 6.8108% notes of '05 with a 3.25-year average life. The Residential Funding notes were trading at 200 basis points over five-year Treasuries when Evergreen bought them.
At a duration of 1.88 years, the Charlotte, N.C.-based fund is modestly long its benchmark, the 1.7-year Lehman Brothers government credit index. It allocates 51% to corporates, 27% to U.S. government securities, 17.8% to MBS and 5% to asset-backed securities.
Fowley also recently instructed his high-yield portfolio manager to move roughly $20 million out of double-B credits and into single-B names in the $440 million Evergeen diversified bond fund. Fowley says single-B credits tend to have higher correlation to equity performance than do double-Bs, and he expects the equity market to rebound in the next 6-12 months.