 |
| Richard Piccirillo |
What is your outlook on volatility? The markets have been volatile since the beginning of the month. Our forecast is not different from the rest. We expect roughly 4% growth for the first half and gradually tapering off to 3.5% in the second half. So long as the Federal Reserve puts short-term interest rates on hold, and we have a low-inflation environment at the long end of the curve, mortgages and mortgage-related products tend to do well. Though we hold an optimistic view about interest rates being range-bound in the coming months, our positions would show that we don't attach too much value to that. We do not want to take interest-rate risk based on that opinion. Volatility has so far been volatile within a range, though at times a wide range. For instance, the 10-year Treasury yield has been moving between 3.65% and 4.2% in the last roughly six months. Constrained volatility has benefited mortgage-backed securities.
What are the other sectors that have benefited from a positive backdrop?
Positive news about the economy such as good GDP, increased earnings and continued de-leveraging of corporate America has been good for commercial mortgage-backed securities and other products. This has led to low delinquencies and low vacancies. Better job growth reduces delinquencies and defaults in commercial real estate.
Describe your portfolio.
More than 10% of the total fixed income portfolio is mortgage-backed securities, which I manage. The $6 billion is invested in mortgage-backed and asset-backed securities. We are approximately 2% overweight in CMBS in relation to the Lehman Brothers Aggregate Bond Index. We are close to neutral in MBS, which is 35% in the Lehman Brothers Aggregate.
Can you elaborate on your investment strategy?
We are never too far from a neutral duration and never too far from a neutral yield curve. In this environment, we expect an eventual flattening of the curve. Our target is total returns in the core portfolio and so we do not bet on duration. While we do believe that being a little overweight or underweight is important to beat the index, we do not believe that betting on duration is our main source of making money. We do not have faith in our ability to over or underweight duration a full year and beat the index. We feel that adds too much volatility to the portfolio. We are very modestly overweight in structured products, such as CMBS and asset-backeds, but not more than 0.05%.
Do you have any sector-specific interests?
It is a tough question to answer because spreads tightened so much last year. For example, in CMBS we like triple-A conduits. We think seasoned double-As are more attractive because they are deleveraged and have more credit support than comparable double-As in the market today. We do not own any investment-grade CMBS with low credit ratings such as single-A or triple-B because we feel the credit curve is flat in CMBS; that is, there is not a lot of incremental spread to go into single-As or triple-Bs because of collateralized debt obligation bids in the triple-Bs. The spreads are tighter for triple-Bs because there is demand for these for CDOs. We don't want to be where others are.
How do you see the home equity loan market?
The supply of home equity loan-backed issues is nowhere near last year's record growth. Our outlook for the whole year is flat. There will be substantial supply but not more than last year. Credit standards have been tightened and the economy has been improving this year. We are not concerned about credit quality.
What's your take on the manufactured housing sector? Does it interest you?
The manufacturing housing sector has greatly reduced liquidity because of the problems it had last year. We had marginal lenders with reduced credit standards flooding the market with supply. Delinquencies, defaults and repossessions of manufactured homes increased by leaps and bounds. Certainly, it has recovered from there. This is evident by Berkshire Hathaway's purchase of Clayton Homes. There are one or two names better than the others in the sector. I have not purchased any manufactured housing because of the problems and low liquidity.
What are the quality names out there?
Vanderbilt Homes is one of the better names out there, but it is tainted because of the problems in the sector. It is an example of how you can pick up a good name in a bad market. It is an opportunity to pick up because the spreads are wide. It is a reflection of the industry and not the company. We do look for value where we are comfortable with the issuer or the entity, even though the sector might not be doing so well.