Nelson Capital Management will invest in Treasury Inflation Protected Securities (TIPS), lower rated investment-grade corporates and step-up agency bonds, on the view that the economy is rebounding and inflation will increase, says Melissa Parker, portfolio manager. The trade is set to begin this week and the overall asset allocation will remain unchanged as all purchases will be financed by sales of assets, she adds.
The Treasury strategy will consist of selling 5%, or $7 million, of 10-year Treasuries and replacing them with 10-year TIPS, keeping the move duration neutral. Parker says a portion of her taxable fund is tax-deferred, which facilitates the purchase of TIPS subject to annual shadow taxes.
The corporate strategy consists of giving up some quality to get more spread while staying within the investment-grade category. A future trade may be the sale of the Procter & Gamble 5.25% notes of '03 (Aa3/AA-) to buy the Walt Disney Co. 5.50% notes of '06 (A3/A-), says Parker. Up to 10% of the overall allocation, or $14 million, could rotate according to this model.
On the agency side, the firm will sell callable agencies and replace them with step-up agencies, for 10%, or $14 million, of the portfolio. Parker justifies this move because interest rates will rise, but not fast enough to prevent the bonds she plans on liquidating to be called next year.
The Palo Alto, Calif.-based asset manager oversees a $140 million fund and allocates 40% to agencies, 40% to corporates, 15% to Treasuries and 5% to cash.
The fund's duration, at 3.55-years, is slightly short its benchmark, the 3.70-year Lehman Brothers Government credit index.