With $32 billion in assets under management, 25% of which is held in ABCP, the short-term portfolio at Oppenheimer Funds controls a little over 1% of the roughly $700 billion U.S. ABCP market.
Unfortunately, that 1% approximately corresponds to the current yield on ABCP. "The biggest concern is that there isn't any spread, and we see a lot of people
reaching for yield," said Barry Weiss, vice president and portfolio manager at Oppenheimer. "But when you reach for yield, you take a credit risk - we refuse to take that. One basis point is not going to do it for us."
Nonetheless, Weiss is not one to write anything off at first glance. "We look at everything," he said.
The percentage of the short-term portfolio invested in ABCP has held steady at 25% since Weiss came to Oppenheimer from Fitch Ratings in February 2000. Because the fund classifies ABCP as an industry, it is unlikely that the allocation would change. The mutual fund company and its subsidiaries manage more than 60 funds with total assets in excess of $150 billion.
Weiss's fund currently holds a stake in at least one of every type of conduit excluding loan-backeds. "At any one time we have 35 to 45 programs on our approved issuer list. The majority of those are what would be considered multi-sellers, with smaller amounts of SIVs, hybrids, securities and credit arbitrage, and others."
Some of the more interesting developments in the ABCP market recently have been in the area of credit. For example, some conduits have been a party to a liquidity put. Weiss said that although he does not believe this is the proper use of a conduit, it would be difficult to avoid investing in something like this vehicle. "The problem is that conduits are not transparent so you have to know ahead of time who does that kind of thing," he said. To that end, he spends a lot of time with pool reports. When something looks strange, he calls for an explanation.
"We spend a great deal of time with the administrator," Weiss said. "If we understand what their focus is, then we are comfortable with what they are doing."
Sometimes the unusual one-off, quarter-end type of offerings can be appealing, such as an unfunded risk participation program that Oppenheimer bought into a few years back. There are still a few of those types of transactions around, but not on a program level, he said.
Most of the assets currently being put into conduits are the more liquid, time-tested classes, Weiss said. He also noted an increase in CDOs and added that he has been following them closely. "You used to see more of the esoteric stuff in the securities arbitrage programs, but those programs are kind of drying up anyway," he said. "There are no franchise loans anymore. They are making the juice mostly in home equity today."
There is a lot of value to be found in smaller programs, defined as under $1 billion, Weiss said. There is doubtless more work involved in owning these types of programs, but for those willing to take on the burden, it is often worth it, he said. Because of the size of Oppenheimer's portfolio, Weiss is limited in how much he can do with the small programs. Some single-sellers and private deals might also fall into this category. "We still see a private deal as a value play," he said.
While extendables have generated substantial buzz of late, Weiss has yet to bite. "We don't really buy extendables," he said. "The comment from issuers is I won't extend because then it's the end of my program.'" Weiss' retort to those trying to sell extendables is that he doesn't want to be there when an issuer decides they don't want to be in the business anymore and so decides to extend. Furthermore, there is a contagion risk, he said.
Weiss is less than enthusiastic about the recent proliferation of SIVs, and said that contagion risk is a major concern in this area as well. There is also considerable risk from an administrative standpoint because many of the people running these
programs have never done so before. However, he continues to purchase them.
Overall, Weiss views increased investor acceptance of ABCP as a positive development, but he remains bothered by ever-tightening spreads and a lack of tiering. Further complicating the issue, some banks appear to be taking advantage of the demand by coming out with programs that may not be as clean as they would
have been a few years ago.
"They know they are still going to fund pretty well," Weiss said.