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| Doug McKoy |
McKoy is a portfolio manager whose specialty areas are asset-backed and commercial mortgage-backed securities. He also co-manages Munder's international non-dollar fund from its headquarters in Birmingham, Mich., a suburb of Detroit. In total, the asset manager has $33 billion under management.
What's your view on the U.S. economy and its impact on the fixed-income market?
It seems like the Federal Reserve is definitely going to raise rates. The Fed Funds rate is 1.5% now and the consensus is that it will be 2% by the end of the year. This should bring us back in line with the rest of the world, we're been so out of kilter with where rates are internationally. Europe, meanwhile, is having slow growth but I don't see them cutting rates anytime soon. We're going to be raising rates and they will keep their rates steady.
Do you expect rate hikes to continue?
I think we will get to 2% in the U.S., but after that I think the Fed can wait and see. A lot of Wall Street firms are changing their tune and are now saying we could stay there because you're definitely seeing some slowing in the world economy. The Fed is walking a fine tightrope here since this has been a consumer-led recovery. They have to be very careful in raising rates too fast. I'm not saying we are going into a recession anytime soon, but things are definitely slowing down and the tax cuts are starting to wear off.
Are international bonds attractive now?
Yes, for the diversification. History has proven that if you allocate a quarter of your portfolio into foreign assets, you are able to reduce your risk. I believe the Fed is going to raise rates to 2% and the European Central Bank is leaving rates at 2%. It's going to be a tough market for U.S. bonds so why not buy international bonds. The spread between 10-year Treasuries and German bunds is approximately 15 basis points and I believe that will get a little wider.
I don't want to sound un-American, but I do think in the long term the dollar will fall. The budget deficit is just out of control. The savings rate is very dependent on foreign capital to keep our economy rolling and the trade deficit is close to 5% of gross domestic product. This economy is built on mountains of debt and no economy has ever borrowed itself to prosperity.
What does your international fund invest in?
We invest in sovereigns, agency-type debt such as from the European Investment Bank and KfW. We invest in non-dollar fixed-income securities, except emerging market debt, and we do not hedge out our currency risk. There are many global funds out there but not a lot of international (ex-U.S.) funds out there. We run it unhedged and use the Citigroup Non-U.S. Dollar World Government Bond Index.
What are your structured finance allocations?
We have $300 million in commercial mortgage-backed securities and another $1 billion in asset-backeds, in sectors including cards, autos and home equities. We generally prefer to invest in the high-quality part of the capital structure.
What's your view on the current state of the ABS supply?
I've been hesitant to participate in new offerings. You really have to look into deals now, a lot of guys are trying to pass on mortgage-related product and get the same home equity spreads. For instance, I look at a true home equity product as $50,000-100,000 average loan balance, but a lot of guys are passing out average balance of $200,000 as home equities. They go out there and are passing it off as home equity. The whole point of home equity is that with smaller loan balances, prepayments are not going to be a factor in that. You have to be careful, there are some nuances in the marketplace.
In terms of issuers, I prefer paper from some of the larger originators such as Centex and RFC.
Dealer shelf sales are becoming a huge part of the market. What's your thinking on them?
Back in the late 1990s, we also saw a lot of activity in that space. I wonder if these guys do their own due diligence. I'd rather see if they did their own due diligence to see if they scrubbed the data before I participate. You can get into a lot of trouble if you don't do that. There are a lot of games going on there and I like to know what due diligence the companies have done on these loans they are selling, I'd rather see how they've done that. I'm kind of leery of some of these dealer shelves.
How does the active hurricane season affect your investing?
You can't really plan for them. I've looked at some of the deals we own and we're so high on the capital structure it won't really affect us. Most of the deals we buy have wide diversification so you're not pigeonholed to one state. That's the beauty of CMBS.
How does the CDO bid affect ABS?
It is having a big impact, especially in CMBS that don't have both a Moody's Investors Service and a Standard & Poor's rating. For example, triple-B collateral that does not have a Moody's rating trades 15 basis points behind. But if I like the collateral and I feel comfortable with it, I think there's value there and I will buy it. That's good value.
Which dealers provide you liquidity in structured finance?
They pretty much all do a decent job, especially in CMBS. A week before Labor Day there was $2 billion put out for the bid and it all did pretty well. In any other asset class, like corporates, it would have blown out. All the dealers do a very good job, it's liquid and you get in and out very quickly, especially at the triple-A level. I would say the same for cards and autos. But there is definitely some differentiation in the prepay sensitive stuff. I don't have many dealer shelf names, but you're definitely going to find some of that stuff is going to be back bid.
Do you use credit default swaps?
No, the fund does not employ derivatives in the portfolio. But I would like to, it would enhance returns.