American Century Investment is considering rotating approximately $75 million from CMBS to home equity loan (HEL) ABS, says portfolio manager Greg Gahagan. He points to the relative stability of HEL prepayment speeds and the widening of HEL ABS spreads as the main basis for this move.
Gahagan thinks the pre-payment wave brought about by the Federal Reserve's easing policy is responsible for making HEL ABS cheap compared to CMBS, in relation to the real risk of pre-payment. HEL ABS offer some value in terms of both price and credit quality in relation to corporates, he argues, adding they've tightened too much relative to their credit quality. He wants to buy HEL ABS in the two- to five-year part of the curve, where he sees the steepening to be most attractive. He is in the market for HEL ABS products combining a PAR or discount price with an insurance-wrapped feature. He targets the primary market for such products, where he thinks he can obtain those two features at a relatively price.
Because Gahagan is already overweight in CMBS and as long as spreads in this sector continue to tighten, he will consider selling some of his AAA-rated CMBS conduit tranches, especially in the seven- to 10-year area, in order to finance his HEL acquisitions. He will maintain his current MBS allocation of Freddie Mac and Fannie Mae 15-year bonds. He does not own Ginnie Mae's or 30-year bonds to keep in line with his core benchmark. Finally, the manager will also keep his AA- and A-rated corporate allocation as is, with most of his positions on the five- to ten-year part of the curve.
Gahagan manages a $1.5 billion portfolio for the Mountain View, Calif.-based investment firm. The asset allocation for his portfolio is 30% treasuries, 30% MBS, 20% ABS, 10% corporates and 10% CMBS. He follows an in-house index, but says that his portfolio duration is approximately the same as the Lehman Brothers Intermediate aggregate index whose duration is 3.50 years.
