Commonwealth Advisors is putting new cash to work in short-duration surrogate cash instruments, according to Walter Morales, president and chief investment officer of the Baton Rouge, La., fund. It manages around $250 million in fixed income. Commonwealth's portfolios are comprised of an investment-grade component which invests in asset-backed and mortgage-backed securities and a high-yield/distressed component. "It's hard to get excited about committing money [in the current yield environment]," said Morales, who added around 35% of his portfolio is currently in low duration investments as he is waiting to see yields increase before taking longer-term positions.
Morales has been buying shorter-dated MBS, variable-rate ABS and hybrid adjustable-rate mortgages. His overall investment-grade component has a duration of roughly one year on the view rates will continue to rise. Commonwealth has not been adding to its high-yield and distressed portfolio as the manager thinks the credit cycle is turning and is waiting for distressed opportunities to arise going forward. "We need to see a repricing of yields to reflect levels of risk," he commented, noting he thinks fair value for the 10-year Treasury yield is from 5.25% to 5.5%. It was at 4.6% on March 28.
Commonwealth's largest credit allocation is in airlines, with a 20% exposure to the sector. "In unsecured paper there are some trading opportunities, but the core of the portfolio is in secured debt," Morales explained, highlighting Continental Airlines and American Airlines EETCs as especially attractive. He is negative on Delta Airlines' unsecured and secured paper. "The long-term backdrop is low-cost carriers are chipping away at the legacy carriers. Very few will survive and if two will, [it will be Continental and American]," he said. He added oil prices remain a serious threat to the industry but prospects for aircraft valuations are good.
There is no specific benchmark for Commonwealth's portfolio, though Morales looks at the Lehman Brothers Aggregate Bond Index for the investment-grade component and uses a variety of high-yield indices.
