Ever since First Union Corp. acquired fixed-income specialists Tattersall Advisory Group last February in order to build up the former's fixed-income business, investors at the asset management company were wary that it would lose its independence under the auspices of such a sprawling banking giant.

"But that hasn't been the case at all," said Robert A. Calhoun, co-director of research at Richmond, Va.-based Tattersall. "We have managed to retain control over our investment process and maintained incentives for employees. Even though the consultant universe generally views banks negatively, so far, the acquisition has played out as advertised - they have pretty much left us alone."

Tattersall brought the staff of First Capital Group - the $60 billion institutional investment management arm of First Union - to 237 from 182, adding 13 portfolio managers and one marketer to the force. The company, a well-regarded fund manager, also added a sizable amount of assets to First Union's pot - nearly $6.6 billion in fixed-income accounts for institutional clients.

Tattersall also benefited from the synergies between the companies. The company gained high yield capabilities, foreign exposure, and the benefits of First Union's $900 million mutual fund platform, Calhoun said. Already, Tattersall will be opening up a high yield fund that it will maintain asset control over.

But still, Tattersall views mortgages - both residential and commercial mortgage-backed securities - as its main focus, and has been pleased with the way the market has been behaving.

"There is just too much yield built into the mortgage market for mortgages to be a loser," Calhoun said.

Straightforward Passthrough Player

Mortgage bonds have comprised approximately $2.3 billion of Tattersall's centrally-managed accounts, with some aggregate-based accounts made up of nearly 50% mortgage product, Calhoun noted.

The company has recently been overweighted in mortgage- and asset-backeds, but underweighted in Treasurys.

"We are always looking for entry points to overweight in spread sectors," Calhoun said. "With spreads as wide as they are in mortgages, there is lots of cushion, and we actually like that. We pay attention to the idea that you cannot outperform in a sector that underyields another."

Calhoun describes the company's investments as "simple" - there are virtually no derivative securities in the portfolio, but only plain vanilla bonds and some planned amortization class paper issued off seasoned collateral.

"We like securities that are easy to hedge," Calhoun explained.

Further, between one-third and one-half of investments are positioned in collateralized mortgage obligations, which often present more total-return opportunities.

Though the company tends not to predict the direction of spreads as a basic strategy, it does not like to the play the game of moving up in coupon in order to deal with shortened durations, as so many investment houses do.

"We definitely focus on relative value here, and not on the curve bucket," Calhoun said. "But we started overweighting spread sectors before most managers, I believe. We like spreads to remain wide so we can earn that additional yield. But we don't try to outhink them. We just take what the market gives us."

CMBS Can Be Counted On

Between 8% and 10% of Tattersall's mortgage portfolio is made up of commercial mortgage-backed securities, and Calhoun is glad that credit spreads for CMBS are finally returning to more normal levels.

"After the technical problems of 1998, credit spreads widened out, where a double-A widened five basis points to the triple-A, the portion that everybody focuses on," he said. "But it is leveling out, and in the longer term, CMBS are cheap to corporates."

But of even greater value, Calhoun says, are Fannie Mae desktop underwriter securities, which are a great hedge to agency debentures.

"We can pick up 30 to 40 basis points with similar securities," Calhoun notes. "We took advantage of the fact that spreads widened between DUS and CMBS."

Even though Calhoun does not think that the addition of CMBS to the Lehman Index had the earth-shattering effect on the investment community that it was supposed to have, he still views this sector as extremely attractive.

"These are still pricing at LIBOR + 35 or LIBOR + 45, and it presents low cash flow variability," Calhoun said. "Also, CMBS are traded by corporate players now, and the cash flow variability of deals over the years has been reduced. Now, it is more of a bullet."

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