The Rewards of Being Well Adjusted
Evergreen Adjustable Rate Fund
Author: Dave Jennings
Last Update: , :
|After listening to Lisa Brown-Premo discuss adjustable rate mortgage securities, one comes away with an understanding that this manager is capable of responding quickly, when necessary, to the slightest changes in interest rates. That flexibility has keep the Evergreen Adjustable Rate Bond Fund ranked first in the ultra short bond category for both the past three- and five-year periods.
||Evergreen Adjustable Rate Fund|
We all sit together. I joke around that we're each slaves in cube farms. We literally sit right off of a trading desk, so we can pretty much speak to each other all day. We do have a weekly meeting that is formal where we cover what is going in the market and what problems we foresee.
Q: How much emphasis do you place on capital gains versus income flow?
In the last couple of years, capital gains have been a more significant return generator for this fund than they usually are. This fund is going to get a lot of its return from income. Every basis point is very dear. The reality is how much capital gain are you going to get with rates so low? They can only rally but so much more. That goes back to that micro process where we select every security very carefully for its income earning potential.
Q: As far as the talk about a housing bubble is concerned, how do you as a person 'on the front line' view this buzz?
I think it is a fair thing to think and talk about. Home prices have accelerated significantly. It's not only been in the last year or so. It's been for quite some time. I see the risk, though, more from the aspect of a 1993 to 1994 scenario. In 1993, home price appreciation was negative. It actually helped set up a more volatile year the following year because folks could not move, basically. If you work in New York, and you get a job opportunity in Los Angeles that you would like to take, one of the aspects of taking it or not is can you get out of your house without losing money. In 1993, with negative home price appreciation, the answer would have been you couldn't. What concerns me most about home prices going up so significantly is that at some point it has to stop. It's not going to go up forever. What I worry about is the very fast prepayment environment we find ourselves in now in comparison to one that happened in 1994 when prepayments virtually ground to a halt. It just introduces more volatility into the markets, which is always something to worry about. I don't necessarily feel it is a bubble. I feel that there is some frothiness to it, maybe, and it won't last forever. But I think there is a great danger in forecasting those things to go on for a long, long time.
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