Q: What is the history of the company and the fund?

Community Capital Management is a registered investment advisor, headquartered in Weston, Florida, and I work from the Boston, Massachusetts, office. We also have an office in Charlotte, North Carolina.

The firm manages just over $2.2 billion dollars, $1.8 billion of which is in the CRA Qualified Investment Fund. “CRA” stands for the Community Reinvestment Act, which regulates banks within the U.S. The fund is a market rate, fixed income fund that invests wholly in U.S.-based community economic development investment opportunities. 

It was launched in 1999 for banks and has grown to include individual and non-financial institutional investors interested in the Fund’s impact investment strategy. We believe we are one of the largest impact investment bond funds in our peer group, possibly the largest in the U.S. 

We maintain a market rate strategy, benchmarked against the Barclays U.S. Aggregate Bond Index, without investing in corporate bonds, which keeps us fossil-fuel-free. Many of our investors prefer to reduce their portfolio exposure to carbon, or oil and gas. Our exposure to credit lies in our taxable municipal strategy. 

Our investors span financial and healthcare institutions, individuals, and foundations, as well as wealth management firms such as Morgan Stanley, UBS (Union Bank of Switzerland), and Merrill Lynch & Co., which now feature impact investment platforms. 

Q: How would you describe your investment philosophy?

Our community economic development investments fall into four basic categories: affordable home ownership, affordable rental housing, taxable municipal bonds that support regional community economic development activity, and, to a lesser extent, small business loans typically guaranteed by the U.S. Small Business Administration. Within these macro categories are a variety of positive-outcomes based initiatives such as affordable healthcare, education/childcare, environmental sustainability, gender lens, healthy communities, neighborhood revitalization, rural community development, and more. 

We buy mortgage-backed securities that support home ownership loans for low and moderate income homebuyers, first mortgages on affordable housing projects for lower and moderate income renters, and taxable municipal bonds that support affordable housing, small business lending, and neighborhood revitalization, among other initiatives mentioned above. 

We are conservative in our approach to risk. We prefer high-quality credit investments that are designed to preserve capital, so we take less interest rate risk on a portfolio basis than the benchmark. We also try to beat the benchmark in generating more income through investments in multi-family housing, where the mortgage securities we buy typically have credit comparable to that of U.S. Treasuries but with higher income and no added credit risk. That income is paid to investors in dividends. 

We only focus on investment opportunities where we can identify precisely what it is we are buying. A mortgage-backed security may have a guarantee from Fannie Mae or Ginnie Mae or Freddie Mac, but that is not enough for us. During the financial crisis, many investors got hurt holding highly rated instruments because they had no idea what was inside of them. Not us. The mortgage instruments we owned performed well because they were all primary residences for low and moderate income home buyers. 

We were not invested in second homes, investor-owned properties, and other ultimately disastrous areas. We do not buy home equity loans, variable-rate mortgages, or private-label mortgage-backed securities. 

Our investors are looking for both financial and community economic development performance in every investment we make. The Fund invests in high-quality credit securities and we analyze the underlying economic activity within a security to ensure it’s an impact investment. 

We also offer our investors the option to target all or a portion of their investment to one or more U.S. regions, and are currently active in all 50 states. If an investor wants to invest in Florida, we invest their dollars in community economic development in Florida. They still get the same fund dividend and net asset value as their fellow investors, but we keep track of and implement those region-specific investment requests. 

Q: What else distinguishes you from your peers? 

Many funds, including fixed income and equity funds, work with checklists, which is a top-down approach to their sectors. They might not buy certain companies, or they might buy the best of the worst, for example. 

We, on the other hand, take a bottom-up approach. We think about impact in every step of our portfolio construction. And we are recognized as being fossil-fuel-free by research and advocacy organizations, which is an important issue given the current focus on climate change. 

Q: What is your investment strategy and process?

Along with our bottom-up approach to build the portfolio, we remain mindful of the sector allocations we use to match up against the sectors of the benchmark, and apply a template of the geographic requests of our clients. The investment size, while a function of what our investors request, tends to be proportional to the general population, with more invested in California and Florida than Vermont or Wyoming. 

We underwrite potential investments from both impact and fiscal/financial points of view. While it naturally varies somewhat by product type, we look at debt service coverage ratios, credit enhancement, and credit structures of the ultimate instruments we own. It’s a fairly standard flow for a fixed income manager, but we also consider impact at every step of the investment management process, not simply right before we do a trade or because we have a compliance checklist. Instead, it is a holistic part of our bottom-up approach. 

We do detailed reporting. We are a mutual fund: we have a net asset value, we have a monthly dividend—we have all the standard metrics of a mutual fund. But we also report on the underlying economic activity our investments support. We tell our clients how many housing units we invest in and how many jobs that created. We share stories about investments and why we think they benefit their local economy. Our level of transparency for our investments is much greater than mutual fund standards. 

Every time we buy something we look at the core economic development activity and the collateral information, because we track all of that in a database. We review each investment and monitor it regularly for both financial performance and continued impact compliance. Should any concerns arise, we have a watch list and a monitor list, and in some cases dialog directly with issuers about performance. 

Q: How do you look for opportunities?

It varies by instrument and type of investment, but we look for stability. We stress-test our investments for worst-case scenarios, such as if occupancy goes down or there is an increase in expenses, for example. We monitor the regional economies because, although we have national credit guarantors—Fannie Mae, Freddie Mac, the Department of Agriculture, the Small Business Administration, etc.—for much of what we have, the underlying economics of our investments are affected by those local economies. 

We have produced a number of white papers on the work we do. Our type of impact investing is also frequently called place-based investing.

As a general example, let’s consider a city property anywhere in the United States. It was built for a specific purpose, but the neighborhood and the economy changed and that property is now abandoned, underutilized, or has deteriorated in some way. There may be community groups or city agencies or foundations working on a plan. Perhaps a former hotel is subsequently turned into affordable residential housing, or a dormitory is later turned into affordable housing. If it is a property that cannot be rehabilitated, it is possibly torn down and something new is put in its place. 

In each of those instances, we would invest only after the work has been done, after new construction and rehabilitation, once there is the need for permanent financing. We would typically buy a 30-year, fixed-rate first mortgage to anchor the owner’s overall balance sheet, and that instrument would then be guaranteed by Ginnie Mae or Fannie Mae, for example. 

In terms of underwriting prior to purchase, we look at all the steps involved in creating the investment opportunity—whether it will be a rental property, what the expected occupancy is going to be, what the debt service coverage ratio will be, and the rules governing who the tenants will be, and that the rents charged adhere with affordability standards for that particular geography. 

If all of that is satisfactory, we look at where it is likely to trade to ensure we can buy it in a way that contributes to the portfolio’s return, so it has to be market rate. We have to be enthusiastic about owning it.

Q: Can you give a specific example?

There is Hotel Oakland, in Oakland, California (0.15% of the Fund’s assets as of 12/31/15), which was originally built as a luxury hotel. Over time, the neighborhood deteriorated and it was abandoned. It was subsequently used as a Veterans Administration hospital during World War II, but then the VA abandoned it and it became an eyesore for years. During the 1980s and ’90s, it was converted into a multi-use property that included a community health center and affordable residential rental housing. Once it was restored and brought back into use, it presented a financing opportunity for us. 

That is just one of many similar opportunities we have invested in. Each presents us the opportunity to make a market rate investment in something designed to make a positive contribution to the community where it is based. 

Q: How do you construct your portfolio?

Our portfolio is diverse geographically because of the geographic targeting various clients give to us, so we feel we have a good spread within the U.S. As we only invest in the U.S., we do not have any sovereign diversification. 

Within the sectors, we are diversified between single-family mortgage-backed securities, multi-family mortgage-backed securities, and taxable municipals from state agencies nationwide. We hold roughly just under 1000 securities, with many investments of $1 million or $2 million in size, and we track every one of those investments in our proprietary database for their underlying economic activity. 

We invest, generally speaking, in smaller opportunities than other billion-dollar-plus bond funds, partly for diversification, but also because we match our clients’ desired regions of investment to the dollars they want to invest. 

We do not see it as a concern that we have a heavy concentration in the government agencies Fannie Mae, Ginnie Mae, and Freddie Mac. We do look at issuer names of the taxable municipals that we own to make sure that we are not too heavily invested in any one populated state, like New York, California, Florida, or Texas. 

Q: What is your sell discipline? 

We are generally buy-and-hold investors who put a lot of investigative work into the securities we own. That said, the mutual fund is a daily liquidity mutual fund, so we do get redemption requests and there are times when we choose to sell securities. 

In terms of our sell discipline, it is a question of the allocation we make between our three major sectors, and that is duration management. We are long only, and we do not use derivatives, so the easiest way for us to adjust the duration is to move back and forth between our single-family mortgage-backed securities, which tend to be shorter duration instruments, and our multi-family securities, which tend to be longer duration. 

Q: How do you define and manage risk?

We limit the risk to capital, so we focus on low-volatility investing. One of the key lessons of the financial crisis is that corporate bonds are more closely correlated to equities than people realized. We don’t invest in corporate bonds, making us a good source of low-volatility capital preservation investments. 

Because we keep our duration generally shorter than that of our benchmark, we look to take less interest rate risk. As fixed income investors, rising interest rates pose a risk to the mark-to-market of our investment. 

In each of the last four years, people thought interest rates would rise, but they did not. That comes with the territory, but we do feel that by being mindful of our duration and the assets we own, we can manage the portfolio in a rising rate environment, if and when it happens. 

We take little credit risk, and most of the portfolio is government guaranteed. Our exposure to credit is generally in AA-type taxable municipal bonds, where we like the credit agency rating, the issuer, and the underlying activity that is being covered by the deal we bought. 

Although taking risks can pay off, our clients like the idea that we have less interest rate risk within the portfolio.