Mitch Stapley, portfolio manager at Fifth Third Investment, will rotate 5%, or $150 million, of the funds he manages from Treasuries into corporates to take advantage of bargains created by the recent accounting woes. He will focus on companies with good fundamentals. It is not so much "what you own but what you don't own," he says, stressing the importance of identifying and selling early those names susceptible to negative headlines. As an example, he has already liquidated notes issued by Qwest Corp. (Baa3/BB+), Clear Channel (Baa3/BBB-) and Cox Communications Inc. (Baa2/BBB).
Stapley says he likes the banking sector, as it benefits from lower interest rates and renewed mortgage activity. Within that category, he likes regional banks such as Branch Banking & Trust (A2/A-) and Washington Mutual (A2/A-) because both have very little exposure to accounting scandals and they trade wider than banks in large money centers. Stapley also sees value in banks that have been exposed to Enron or WorldCom and he is considering buying some of them. As an example, he wants to buy the Bank of America 6.25% notes of '12 (Aa2/A+), which traded at 110 basis points over the curve last Monday.
Another sector Stapley favors is autos, as he predicts demand will hold up well with an annualized monthly rate of 16 million units for this year. He will buy the Ford Motors 7.20% notes of '07 (A3/BBB+), which traded at 242 basis points over Treasuries last Monday, and the General Motors 6 1/8% notes of '07 (A2/BBB+) which yielded 179 basis points over the curve.
To finance the purchases, Stapley will sell short-term Treasuries because short-term rates will rise the most when the Federal Reserve raises rates--not until next year, he says--or when the market starts to recover, which will be sooner.
The Grand Rapids, Mich.-based investor manages a $3 billion portfolio. He allocates 46% to corporates, 22% to Treasuries, 10% to mortgage-backed securities, 10% to asset-backed securities, 10% to agencies and 2% to cash. At 5.15-years, the fund's duration is slightly shorter its benchmark, the Lehman Brothers government credit index, which has a 5.33-year duration.