Cavanaugh Capital Management (CCM) will begin buying corporate bonds for its portfolios for the first time since 1994, in an effort to pick up additional yield. Megan Brune, portfolio manager at the Baltimore-based firm, says CCM will seek to allocate up to 5% of money currently under management to corporates, selling Treasuries in accounts with high Treasury exposure. CCM may also allocate up to 10% of incoming money to corporate bonds. Brune says CCM expects $40-145 million in new money over the next three months.
CCM has used taxable municipal bonds as a corporate surrogate for the past seven years. However, over the last three months, yields on taxable munis have traded similarly to triple-A corporates on a yield basis, where previously yields were more in line with single-A credits. CCM will seek to add financial credits, with an emphasis on banks, as they are among the most stable names in the corporate sector. Currently, the corporate credits among CCM's $350 million in taxable fixed-income have all been inherited from previous managers. Brune believes Treasury yields are unlikely to fall much further, and are at greater risk of rising.
CCM inherited the Xerox 7.25% of '06 (Ba1/BB) and the Frontier Corp. 7.25% of '04 (Ca/C) from previous managers and has tried to unload them as ratings have plummeted to below the levels at which CCM typically holds credits. CCM wants to sell the Xerox paper at 86, but has only seen bids as high as 76. It has marked the Frontier paper at 17, and essentially wrote it off as a lost cause, says Brune.
Cavanaugh's modified average duration is 3.20 years versus its most common benchmark, the 3.72-year Lehman Brothers Intermediate Government Credit Index. It allocates 33% to mortgage-backed securities, 22% to Treasuries, 16% to agencies, 16% to taxable munis, 11% to corporates and 2% to asset-backed securities.
