Colonial Management Associates, an investment management arm of Liberty Funds Group, has been buying the intermediate bonds of electricity generation companies because industry operating prospects remain excellent for the year, according to portfolio manager Richard Stevens. Stevens recently participated in theLehman Brothers led 8.30% Mirant Americas (Baa3/BBB-) senior notes of '11 144a offering two weeks ago, and has also been adding or establishing positions in NRG Energy (Baa3/BBB-) and Avista Corp. (Baa2/BBB). He argues that the cash flow thrown off by these companies will be enough to warrant possible consideration for upgrades, worth in his estimation an additional 20 basis points or so of tightening. He also says that at average spreads of 230-280 basis points off treasuries, paper in this sector has the opportunity to tighten into the sub-200 range.
On the other side of the energy coin, Stevens has been selling BBB-rated oil producers and distributors to make these purchases, reasoning that with this sector having narrowed in to the 150-160 basis point off the curve range, it is time to take profits. He would not specify particular credits he has been selling or avoiding. He has also been paring down his agency position, especially in the 10-year bullet sector, where with spreads in the upper 60s, he sees little potential upside.
The $300 million fund has an asset allocation of 45% investment-grade corporates, 40% U.S. Treasuries and agencies, and 15% high-yield. It has a duration of 5.50 years, neutral to its historical average. Stevens notes that the fund, while not using a benchmark, does not make duration bets.