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| Charles Urban |
Charles Urban manages all of Caterpillar's fixed-income accounts with assets under management of almost $1 billion. Prior to joining Caterpillar, Urban managed a $2 billion life insurance compact portfolio as v.p. and senior portfolio manager for the Windsor Financial Group in Minneapolis. He has also worked at Norwest Bank first as an investment analyst and then as a v.p. managing fixed-income securities in the bank's trust department.
What is your current view on the economy?
I believe there continues to be decent momentum in the economy coming basically from the industrial and manufacturing side, as we saw some decent momentum emerging from the second quarter of 2005. Unfortunately, this is being masked by headlines regarding consumer spending relating to the real increase in oil prices and a weakening view of the housing market. All things being equal, I don't see any substantial news at least near term to keep the Fed from moving along its measured path and continue to raise the target rate.
Some people have proposed that the Federal Reserve rate could be pushed as high as 5%. What is your view on this?
I'm not prepared to say that 5% is in the cards, but I do think that we will be at, and I'm not too far off the consensus here, 4% by December with an even chance for a move by the Fed in December, potentially 4 1/4% , that's pretty much what's assumed in the market right now. I'm not too much different than the consensus and with that in mind, we're not making any bets based on Fed policy.
What sectors do you see as attractive right now? Which do you see as unattractive?
In general, we're not hugely enamored with the mortgage market but within that market, we currently have a bias toward 15-year mortgage paper as opposed to longer paper. As it relates to the corporate market, we feel corporate, or debt securities in general, are fairly valued or fully valued and with that in mind, our portfolios are neutral to slightly underweight corporates. Part of which is also influencing that is the shareholder friendly action that has been creeping into the market over the last three to six months. Combine that with the Carl Icahn and similar type investors that are pressing management even further, so we are being very cautious in those sectors. In general, I'm not opposed to what some of those investors are trying to do, unlock shareholder value, but as a bond investor, it's not necessarily in my best interest. If we are going to be neutral or underweight there, we are trying to look for some high quality surrogates and we're finding that in certain sectors of the asset-backed market and the commercial mortgagebacked market.
Where are you putting your new cash to work?
Within the objectives and guidelines of the portfolios that we are running for our clients, it's going to be in line with those sectors I previously mentioned. We're looking at the 15- year mortgage sector as well as increasing the weighting of the portfolios to primarily the high quality asset backeds and CMBS sectors. We are not much of a player in the lower investment grade tranches of those sectors. We are involved in the new issue market and as deals come along, we'll take a look at them and get involved as necessary.
What market trends do you see developing?
I've been involved in the fixed-income market for a few years and the thing that is interesting and frustrating about the fixed-income market is that what is important in the marketplace today is a non-issue tomorrow. If you want to take a longer term look at trends that are developing you have to take a look at the fact that there's a potential issue forming in the residential real estate market. When you look at the first-time home price affordability index it is at its high for at least the past 10 years and the different types of money and investors that are getting involved there, you start to take further heed to some of the issues that a potential bubble in that market might present to the economy. I don't know if we've quantified that 100% yet, but it is an issue out there.
And in the corporate sector?
Trends in the corporate sector are more of the same in terms of people shopping for shareholder-friendly actions which is not good for the bond holders. I think, in general, balance sheets are great and it's been a great ride, but a lot of the positive news for bondholders is past us, we're kind of on the downside of the trend there. When corporations were cleaning up balance sheets and looking to improve cash flow and pay down debt, they were doing things for the bondholder. You start to either lever back up again with the balance sheet, or take your cash to increase stock buybacks or dividends and that is not necessarily bondholder friendly, I think this trend is happening more and more. The increase in the mergers and acquisitions business and private equity business is not good for bondholders either. In those cases, the surviving entity may have a less strong balance sheet. I'd be hard pressed to think when someone would call those bonds.
What is your investment strategy until year end and moving forward?
I think the economy still has a little bit of juice in it and with that in mind, we are probably on duration versus our benchmarks. The Fed tightening will start to take effect. It's my opinion that the first six months of the Fed tightening, the last half of 2004, were really just getting the real excess accommodation out of the market and the real start of the Fed tightening didn't start until this year. From that standpoint, the ramifications of the Fed tightening could potentially start to take effect late fourth quarter or first quarter of next year and we want to have the portfolio positioned as we move into that in a little more of a defensive pattern. Again, when I want to get defensive I give into what's going on in corporations, things like that. We will continue to underweight corporates and improve the portfolio from a quality standpoint with what we hope to be non-event risk type securities and also near-term; look for the curve to continue to flatten out in the long end, although a lot of that game is already over. As we move into 2006 we'll try to assess when the Fed may say 'no mas' and look at what they can do to keep economic growth from slowing.
