Call Los Angeles-based investment firm Metropolitan West Securities Inc. a spread hawk with a conservative mindset, and you would get little argument from Chief Investment Officer Terry Crow. Charged with managing $20 billion of fixed-income investments, Crow swoops on cheap ABS product that has short maturities and well-defined cash flows.
Over the last three years, the firm has grown its asset-backed portfolio from a scant percentage of overall funds to approximately $4 billion, or 20% of its total investments. Crow said MetWest looks to continue this level of dedication to securitized product going forward, perhaps with some allocations to collateral new to the firm from the CLO and the stranded cost sectors.
MetWest is a buy and hold shop looking for yield. As Crow says, the West Coast company "very seldom trades out of a position." The main strategy affecting the firm's ABS buys is its need to match funds to its securities lending accounts. The firm raises the cash it uses to invest principally through lending government securities, and will fully match the maturity of its loans to the maturity on its ABS holdings.
This has kept MetWest on the shorter end of the spectrum: three years and less for the floating-rate offerings and not much beyond the one-year mark for fixed-rate debt. This has kept the company out of longer-oriented sectors, like home equities, and into the more vanilla, liquid asset classes - mainly credit cards, autos and equipment leases. The strategy has the firm hedge against extension and prepayment risk.
"We try to run a par portfolio. So a mixture of monthly floaters and a lot of one-year, fixed-rate amortizers keeps us in a duration we're happy with," said Crow. "Except for the rare home equity deal that is structured as a super PAC, with a huge range that doesn't extend out in life, I want all my cash flows inside of a three-year period."
Crow said he keeps within the parameters of MetWest's securities lending profile by maintaining an average duration at around the 45-day level.
"Auto [revenue streams] are much more defined," he said. "We're rarely in the home equity market because of the long tails and the prepayment risk. But if a one-year auto asset-backed extends out by more than a month, you'd be very surprised."
In terms of autos, MetWest carries a mix of prime and mid-prime credits. Though spreads in the subprime auto loan market have generally remained fat, Crow has not been enthusiastic about looking down the credit spectrum in the sector due to servicer risk. That's partly because MetWest maintains an average credit quality rating of double-A for its entire portfolio and buys strictly triple-A asset-backed paper. Size also has kept the firm away from the subprime market. Typically, it buys in lots of $50 million. Thus far, the subprime market has not offered the kind of volume to meet MetWest's needs.
Getting allocations, though, has not been much of a problem, according to Crow. Because it is structured as an asset/liability shop, Crow said MetWest has been able to get the big chunks it's looking for on most short-end, fixed-rate deals because of the absence of the buy and sell folk.
"Since we're buy and hold, we're not concerned with rolling down the yield curve," he said. "The one-year amortizers are not very popular with the total rate-of-return guys."
MetWest will buy either on the short or long side of its short-end guidelines dependent on how market conditions are affecting pricing. If spreads tighten, as they have done recently, Crow looks for cheaper deals in the one-year area. If spreads go out, he will extend his buying out to the three-year area.
"We've been moving our maturity back in as the credit cards tighten," Crow said. "Whereas in the fourth quarter, we did lots of three-year product to take advantage of the spread widening. We're doing mainly one-year amortizers because we think the longer-term spreads are too tight."
The firm has been buying short-end, fixed-rate equipment leases and auto ABS lately, and has stuck with corporate debt - the other big area of investment for the firm - on the fixed-rate side. The firm makes a tradeoff between two- and three-year credit floaters versus corporate FRNs when things tighten in the card sector.
The West Coast investment house has a preference for senior/subordinated paper, but because it buys a lot of mid-prime auto ABS, it owns a good amount of wrapped paper.
"We have confidence in the triple-A wrap companies," Crow said. "Though we do look at and keep tabs on their credit."
CLOs and utility deals have spurred interest at MetWest recently, though the firm has not bitten from either apple yet.
"We took a hard look at those deals," Crow said. "The real key to us is the nature of the cash flows. We don't want flows that tail out over a long period of time. But if a deal came in significantly cheap, we are comfortable with the structures." - SK
