Schwab Upgrading Credit Quality

Charles Schwab Investment Management has been upgrading credit quality in corporate names and asset-backed securities.

  • 25 Mar 2005
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Kim Daifotis
Charles Schwab Investment Management has been upgrading credit quality in corporate names and asset-backed securities. Within corporates, the fund manager has been raising the holdings from an average rating of low single-A to mid- to high single-A, according to Kim Daifotis, cio of fixed income. "We think corporate America will start to releverage its balances sheets, which may result in more downgrades," Daifotis said, explaining why it wants to raise credit quality in its portfolios. In addition, the manager has been selling subordinated ABS tranches in favor of more senior tranches and going from a triple-B average exposure to a double-A average. "Spreads are too tight for the risk you're taking" and are not justified by fundamentals on lower-rated classes, he said. He declined to give examples. Daifotis oversees $115 billion in fixed income from San Francisco.

One of the main benchmarks Dafoitis uses is the Lehman Brothers Aggregate Bond Index. The manager is 5-6% underweight Treasuries and agencies because other fixed-income sectors provide more yield, he said. Conversely, the manager is 2.5-5% overweight in ABS and mortgage-backed securities.

Dafoitis employs a barbelled duration strategy that is up to a quarter of a year short the duration of his benchmark and is underweight short-to-intermediate Treasuries. The manager said he would maintain his barbelled strategy in the near term as he expects interest rates to continue to rise.

  • 25 Mar 2005

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