Looking for a way to invest in do-good projects like affordable housing, wind farms, the Greater Boston Food Bank or small businesses like the first woman-owned solar energy company in Pennsylvania?
"If you want a decent return with safety on something that's doing good here in the U.S., you'd be hard-pressed to find a much better investment than Community Capital Management's CRA Qualified Investment Fund (CRAIX,)" says Andy Loving of Just Money Advisors, in Louisville, Ky., who specializes in community investing. With a return of 4.34% in 2008, he points out that the fund withstood the 2008 meltdown-even in mortgage-backed securities. "They had zero exposure to any of the toxic mortgages," he says, "because they only invest in bonds that are CRA-qualified."
Technically, there is no such thing as a CRA-qualified bond. The Community Reinvestment Act (CRA) was passed in l977 in response to redlining, whereby banks refused to make loans to people living in low-income neighborhoods. In l994, the rules were changed to incorporate actual tests by regulators for lending, service-and investment. The primary purpose must be community development, and beneficiaries of the bond proceeds must be low and moderate-income families, low-income neighborhoods, and communities targeted for redevelopment.
Most small banks rely on limited personnel--many of whom did not know how to make CRA-compliant investments. Thus was born CRAFund Advisors (since renamed Community Capital Management), which launched a mutual fund in l999 to serve this niche. The founding investors: Todd Cohen (currently president and chief investment officer), David Zwick and Peter Cooper. Chairman Barbara Van Scoy, one of Institutional Investor's "20 Rising Stars of Fixed Income" in 2008, has been the firm's senior portfolio manager since the fund's inception.
Although banks still account for roughly 90% of the billion-dollar fund, it is also open to retail (CRATX) and other institutional investors (CRANX.) The firm also manages separate accounts for mission-related investors such as foundations whose needs the mutual fund does not meet. For example, it recently bought bonds on behalf of RSF Social Finance's Donor Advised Fund that will support the Comprehensive Everglades Project, the world's largest eco-system restoration effort. It partnered with the Kellogg Foundation to purchase $3 million in bonds supporting community-based food enterprises, facilities for schools and nonprofits to build stronger local food systems and sustainable food production.
Today, about 75% of the fund is invested in Fannie Mae, Freddy MAC and Ginnie Mae single-family and multi-family mortgage-backed securities (MBS.) Unlike agency debentures, cash flows for the MBS are tied to specific housing properties, which means they can be assessed for CRA compliance. Nearly 15% of the fund is invested in taxable municipals and the balance in Small Business Administration loans and pools. With $200 million invested in renewable energy and in green jobs and housing, the firm claims to be the largest green fixed-income investor in the country. About 90% of the fund's bonds are AAA. For 2010,the return for retail investors was 4.78%, according to Morningstar.com, and annualized three-, five- and ten-year returns were 4.65%, 4.67% and 4.85%, respectively.
So how did CCM escape the mortgage mess two years ago?
Old-fashioned due diligence--a result, in part, of complying with the CRA.
"Since this is something that is highly regulated by bank examiners, we had to dot our I's and cross our T's and provide high levels of documentation to our [bank] investors that this bond supports these activities," Van Scoy says. "If I can't specifically define what the bond proceeds are going toward, then it's not a suitable investment."
In fact, it wasn't just a matter of checking credit ratings and screening for CRA criteria, itself labor intensive since most agency MBS do not qualify. In practice, it meant that while many fixed-income investors were buying blind pools of mortgages, CCM custom-created its single-family mortgage pools--by reviewing loan tapes, FICO scores and loan-to-value ratios.
"They are only owner-occupied homes--no second homes or investor property," she says. "We buy 30-year fixed paper because we didn't feel it was prudent for low-income borrowers to have adjustable rate liabilities. By and large, low-income families cannot afford a 15-year mortgage."
Something else that makes CCM's fund unique is its emphasis on taxable municipal bonds; something Van Scoy calls an "after-thought step-child of the muni market." In housing, for example, the IRS only allows tax-exempt status for loans to first-time low-income borrowers-not for refinancings or subsequent home purchases. The latter still qualify as municipal bonds, but they are subject to federal taxes.
But here's the hitch: Like the agency multifamily MBS that the fund buys, taxable munis are not included in most indexes. As such, Van Scoy believes they are typically undervalued and present an opportunity to increase income versus the Barclay's Capital US Aggregate Bond Index (Barclay's Aggregate) the firm's benchmark.
"You don't have the Pimco's of the world competing for a $3 million taxable tail from a state housing agency," she explains. "They are buying $25 [million] to $50 [million], even $100 million at a time. On the taxable muni side, you rarely see issues that big."
Since about half of CCM's portfolio is not captured in the index, it uses specific security types as surrogates: multifamily MBS for agency debentures, and taxable munis for corporate bonds. In a white paper published at its website, CCM argues that too much exposure to corporate bonds actually reduces the diversification benefits of fixed income securities because their volatility is highly correlated with that of equities, especially when equity markets turn south.
Even so, at the end of 2008, the fund's return in 2008 was 90 basis points below its benchmark. In 2010, when there has been a hot market for corporate bonds, CCM's retail performance dropped to the 97th percentile of Morningstar's Intermediate-Term Bond category. Of course, comparing bonds that support affordable housing and produce markets in food deserts with those that back global corporations may well be an exercise in futility. The fund's closest competitor, Access Capital Community Investment A earned 1.10% for the year ending Sept. 30, and 4.94% for 5 years and 4.79% for ten years.
The big question, of course, is what will happen to the fund if the muni market explodes. "Obviously if the entire universe tanks, we're not going to be immune to it," Van Scoy says. But, she points out, there are different sectors within the muni market. "We're not buying pension obligations. We're not buying bond anticipation notes from California. We have very few bonds that are subject to appropriation risk. Everything that we buy has a stream of cash flow set aside for it."
That said, California municipals account for over 1% of the fund's portfolio, something that Van Scoy admits will require "more babysitting than Texas."
As always, the devil is in the details. Stay tuned.