Cavanaugh Capital Management is looking to acquire mortgage-backed securities and pick up additional taxable municipal bonds, both with maturities of five years or shorter, as rates appear headed higher. Megan Brune, portfolio manager of $510 million in taxable fixed income in Baltimore, says she is maintaining her focus on these sectors as a way to "maintain our defensive bias." She plans to use new cash to fund the purchases, which will not change the portfolio's existing allocations.
Brune prefers Ginnie Mae pools for the fund's mortgage-backed securities and uses taxable munis as a surrogate for corporates, stating that she has only 5-10% in unsecured corporates (single-A or better). Cavanaugh prefers to buy triple-A, credit-enhanced munis as opposed to corporates because munis offer the same yield as single-A or double-A corporates while still maintaining the highest rating.
Cavanaugh manages bonds against the Lehman Brothers Aggregate Bond Index. With an average duration of 3.8 years, Cavanaugh is much more defensive than the benchmark's average of 4.5 years. The fund manages various accounts with the goal of allocating 43% to MBS (about neutral to the index), 41% to corporates and taxable munis (overweight), and 15% to government bonds. In the anticipation of higher interest rates, Brune keeps the fund underweight in Treasuries, because she gauges that they will be the worst performers relative to other bonds.
