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| Christopher Sullivan |
United Nations Federal Credit Union is looking to add $50 million in adjustable-rate-mortgages (ARMs), in a defensive move that will be financed by putting new cash to work and selling Treasuries and agencies. Christopher Sullivan, portfolio manager of a $1 billion fund, says he feels ARMs are some of the most defensive short-duration investments among mortgage paper and many other fixed-income asset classes. ARMs provide some yield attractiveness given the shape of the curve as well as limited price volatility given their structure and nature, says Sullivan. He plans to invest the $50 million into the new Ginnie Mae hybrids, which came out a few months ago, and has of late also been adding a variety of ARMs, including three-year agencies and new Ginnie Maes. Sullivan says he most recently added $30 million in one-year Ginnie ARMs. To finance the move, Sullivan says he will sell $10 million of long-dated Treasuries and at least $25 million from the fund's agency bucket. Sullivan feels ARMS will remain attractive for awhile, given the firm's view that there will not be a significant re-flattening of the curve to any great extent for some time. He believes the Federal Reserve is committed to continuing to supply liquidity and protect the general economic expansion for a while.
The fund is currently allocated 15% to corporates, 15% to Treasuries and 15% to mortgage-backed securities/mortgage derivatives. Another 30% is held in agencies and 15% in taxable munies, with the rest in cash. The fund has a 2.5-year duration and is short its customized benchmark, which is derived from the Lehman Brothers Aggregate Bond Index.
Elsewhere, Sullivan says spreads are tight in the corporate world and that a good portion of that market is overvalued, especially high yield. In fact, he sees limited upside in junk bonds and focuses his corporate allocation on financials, including banks such as Bank One, SunTrust, SouthTrust, National City Bank and Wachovia. He expects consolidation will continue in the wake of the JPMorgan/Bank One merger.
The bank portfolio plans to start investing much more significantly in non-dollar debt toward the end of this year or early next year, according to Sullivan. He says the investment fund needs to more closely reflect the demands of its 65,000 members as the UN's efforts expand around the world. By investing more in non-dollar assets, the fund can match its liabilities abroad, which include member loans, savings accounts and mortgages. As a result, the credit union plans to start investing in Swiss franc- and euro-denominated bonds at the end of the year. Sullivan says there is no limit to how much the fund could eventually hold in non-dollar assets.
