Merganser Capital Management in Boston, which has historically been overweight the broker-dealer sector, has cut its holdings from 15-20% of the portfolio to 5%, selling $350 million worth of the bonds, which it views as too rich. The Morgan Stanley Dean Witter two-year medium term notes issued two weeks ago came at 80 basis points off the curve, compared with comparable finance sector or bank paper that is generally priced about 100-120 basis points off, notes Bob LeLacheur, who manages over $2.8 billion for the firm. He adds that five years ago MSDW paper would have traded 50-100 basis points cheaper to any bank. As the equity market began penalizing broker dealers with poor P/E ratios, they got rid of risk, and following recent mergers become market favorites.
LeLacheur is using the money to buy one- to two-year real estate bonds, a strategy he has followed for over one year. "Broker-dealer paper is coming at LIBOR + 50 to LIBOR +100, while REIT paper is at LIBOR +20, allowing me to pick up 75 basis points for high-quality paper." He especially likes Equity Office Property. So far Merganser Capital Management has bought about $84 million in short-term REIT paper
LeLacheur's fund is allocated 50% investment-grade domestic and international corporates, 35% asset-backed securities and 15% mortgage-backed securities and agencies. He uses a variety of benchmarks along the yield curve, from the Merrill Lynch One- to Three-Year Treasury index to the Lehman Brothers Aggregate index.