Indiana Farm Bureau Insurance will look to swap out of financials into triple-B utilities on the view that utilities are oversold as a result of Enron-related worries. Bradford Barklay, portfolio manager of $1 billion in taxable fixed-income, says he will look at triple-B names because he does not want to take a large gamble on the sector. He will look to add to holdings of Dayton Power & Light's 6.875% of '11 (Baa1/BBB). Barklay says he likes the company because it is conservatively managed, and, although it is a bit more highly leveraged than other utilities, it had an attractive yield of 205 basis points over Treasuries on Jan. 8. To finance the trade, the insurer will likely sell a five-year Bear Stearns commercial mortgage obligation originated by GE Capital with a 5.06% coupon. Barklay says he will sell the bonds because he believes the three- to five-year area of the curve is vulnerable to underperformance because it did very well in 2001.
Barklay eventually plans to move some $20-40 million into the sector, and will continue to look at other utilities yielding more than 200 basis points over Treasuries. To finance additional purchases, he will swap out of financial names such as Key Bank, Bank of America and Banc One.
The Indianapolis-based insurer has an effective duration of approximately 5.58 years. It does not follow a benchmark, but does not like to let duration fall below 5.5 years. It allocates 56.7% to corporates, 13.6% to utilities, 9.5% to CMOs, 8.6% to collateralized debt obligations, 3.1% to Treasuries, 3% to taxable municipal bonds, 2.8% to Fannie Mae Delegated Underwriting and Servicing pools, 1.5% to asset-backed securities, 7% to agency pools and .3% to agencies.
