Barcelona-based InverCaixa is Spain's third largest fund manager with close to E4 billion in fixed-income spread product under management, E500 million of which is dedicated to asset-backeds. Carrascosa has been working at InverCaixa for a year along with Francisco Javier Collell head of the credit team, and Anna Alcover fund manager. Previously, he had been on the high-yield research team at Merrill Lynch in London.
Describe your investment strategy. Are you considering making any changes?
InverCaixa has been involved in the asset-backed marketplace for the last four years. Seventy to 80% of our portfolio is mortgage-backed securities and we invest in triple-A or double-A, floating rate, short-dated paper. Getting spread over EURIBOR without sacrificing credit quality is the main reason for investing in ABS. However, those guidelines do not prevent us from looking at issues on a deal-by-deal basis. We have auto loans, non-performing loans and issues from the Italian treasury in our portfolio in addition to MBS. We also buy general consumer loan deals and student loans like the recent Sallie Mae euro-denominated issue. We've bought some auto lease deals and general lease deals. As for most of the Italian treasury deals, a large part of them are already funded and we regard them as quite a safe investment.
We are starting to look a little further down the credit curve. One problem is that tranches we are buying have to be at least E500 million so they are liquid, and a lot of the lower-rated tranches are not that big. In terms of rating, we could go down to triple-B minus, in theory, but in practice we've stuck with triple- and double-A large issue deals. That's why we've been sticking with MBS because those deals are very liquid and repeat issuers are interested in maintaining liquidity of their deals.
Aside from the present drought in the primary market what are the major challenges you face in the current market environment?
There has been much more attention to ABS in general, more investors buying and pricing is much tighter. It is harder to find deals that are priced at EURIBOR plus 30 like you could one year ago. When you go down the rating scale, the issue size is a problem and most of the time it's already sold. There are few new players that are looking at the lower-rated tranches and buying the whole thing. In triple-A, we buy E10-20 million, a lower rated tranche would be E5-10 million, but up to now we really haven't done that. The main problem we're having right now with MBS is the fact that you see banks bringing deals with much less seasoning and higher loan-to-value ratio, that are still getting tight pricing despite the fact they're selling the most recent mortgages they have written. House prices have risen quite sharply and people are taking more and more debt and we are concerned by that. When we look at MBS, we want to see a pool with a seasonality of three years ideally, one year at the least, and LTVs of 60-70%, but no more than 80%. That is very difficult to find today. We're having a hard time finding new deals to buy and the quality of the deals is much lower.
Where are you seeing the best value in the market at the moment?
I don't see that much value in the market. MBS is very tightly priced if you want to get a little bit of spread pick up you need to get into some funky structures that we are not comfortable with. Even if you get into lower rated tranches it's quite crowded, because more investors are willing to go lower and prices are quite tight. MBS is the most expensive part of the market right now and especially with U.K. master trusts it's hard to know what the seasonality of the mortgage pool is, because they allow for substitutions. Maybe the Italian market has been a little less expensive, because there has been a lot supply from the government and other Italian issuers.
Are there issuers/asset classes that you consistently avoid?
We have avoided collateralized loan obligations and collateralized debt obligations. We cannot invest in synthetic CDOs, because we cannot invest in derivatives. We could invest in CDOs where underlying assets are high-yield and investment-grade loans or bonds. We haven't been investing in CDOs at all, because we're not comfortable investing in something where we don't have intimate knowledge of the underlying assets. You need to dedicate a lot of resources just to look at those deals. Also, we have a corporate fund that invests in those bonds directly and if we wanted that exposure we would just do it that way. We have bought one CLO from a Spanish issuer where we have a good knowledge of the kind of loans they have made and the kinds of companies they've loaned to.
The vast majority of European asset-backed issuance is residential mortgage-backed deals. How do you manage that? Are you able to have enough diversity in your portfolio?
We manage RMBS on a country-by-country basis since we don't want to have too much concentration in one country. RMBS is the bread and butter of the market and if there are new deals in the market apart from RMBS, they have to be large enough for us to invest in. RMBS is popular because they are repeat issuers and investors don't have to do the credit work every time. If people want to bring new types of deals they need to come with a wider spread. It comes down to good structure and pricing. For instance, let's say you want to bring an airplane lease ABS deal. In the current market, with all the negative press, I believe it could be priced, though with a significant spread premium over an RMBS triple-A.