Fifth Third/Maxus Investment Advisors is looking to boost its asset-backed allocation from roughly 3% of its $500 million taxable fixed-income portfolio to 10-15% in anticipation of a more prolonged economic downturn. James Bernard, senior fixed income portfolio manager, says he wants to sell corporates and agencies to buy ABS in order to have "real live assets backing up our debt, especially given the number of corporate credits that have balance sheet concerns in the down economy." As an intermediate buyer, he would look to four- to six-year credit-card and auto paper, sectors in which he believes he can find well-structured paper with decent prepayment lockouts. Bernard, whose purchases are usually $1-3 million in size, is not attracted to any names in particular, but he will steer clear of infrequent issuers whose paper is not as liquid. He adds that he is comfortable selling agencies because spreads have narrowed in recent months and there is still political risk associated with GSEs.
Bernard says he expects a recession that's "not deep but long." Manufacturing reports, among other indicators, point to a slowing that could last four to six quarters but likely will be tempered by strong foreign demand, he explains, and productivity gains should continue to keep inflation in check. Given his low growth and inflation expectations he says he may push duration- currently 5% long that of the 3.57-year Lehman Brothers Intermediate Government/Credit Index- out to 20% long the benchmark. The remainder of Cleveland-based Maxus's portfolio is allocated 45% to corporates, 22% to agencies, 20% to MBS and 10% to Treasuries.