Brendan White, a portfolio manager with Cincinnati-based Fort Washington Investment Advisors, is going to shift 5%, or $55 million, of the firm's high-yield assets from double-B and above bonds into single-B's. The move is based on the view that both the high-yield market and the economy are set to rebound in the next six to 12 months. White says he has not started the reallocation yet, although the move is imminent, and that there are no specific triggers other than a close look at economic output figures, consumer confidence numbers or a rally in the stock market, all signs he is confident are improving.
White would not disclose any particular names as trade examples, but says he will more probably sell double-B rated bonds in the healthcare sector because most of the price appreciation has occurred in this sector. He will reallocate the proceeds of those sales into single-B rated cyclical bonds in either capital goods or telecom. For capital goods bonds, he cites some of the higher quality auto suppliers, on the view that a surge in consumer demand will benefit this sector. For telecom bonds, he says he will look at those names currently in the process of restructuring.
White says he is considering buying into several energy companies recently downgraded by Moody's Investors Service as a result of the collapse of Enron. Two of those names include Calpine Corp. (Ba1/BB+) and Dynergy (Baa3/BBB+), but White declined to specify specific coupons or maturities. White says all of the firm's sales and purchases are in the five- to 10-year maturity range, as he says the high-yield market is not sensitive to duration or average life considerations.
White manages a $1.1 billion high-yield fund with an asset allocation of 57% double-B and above high-yield bonds, 40% single-B rated bonds and 3% triple-C rated bonds. By comparison, the Merrill Lynch high-yield master index that serves as a benchmark for this portfolio allocates 47% to double-Bs, 40% to single-Bs and 13% to triple-Cs.
With a 4.30-year duration, the fund is short its index's duration of 4.60 years.