Marty Schafer, a portfolio manager at Principal Global Investors, a Des Moines, Iowa-based fund manager with assets under management of over $1 billion, is putting new cash to work in high quality shorts. "With the rising rate of the Federal Reserve I see absolutely no reason to buy in longer-dated paper, the rising rates would only hurt us against the index; I say the shorter the better," explained Schafer. Schafer has been putting his new cash to work in floating-rate debt and some commercial mortgage-backed securities.
In recent weeks, Schafer has been "grooming" his portfolio. The last week of July saw him sell some of his older short-dated paper in companies such as CVS, Coca Cola and SunTrust. "I've been sorting through extremely rich bonds and selling them. I'm being paid more for moving up in quality," he said. In turn, Schafer has been investing in newer shorter-dated paper with Salle Mae's new issue floater, which expires in July 2009 and paid 14bps over swaps while being 'A' rated. "My strategy is really to take advantage of the new issue market, they are priced very cheap to the secondary market," said Schafer. Schafer stated that he would not consider any names at risk for a leveraged buyout, even if it did offer more yield. "I like to avoid that risk whenever possible," he noted.
Schafer also points out that he sees no need to buy on dips at this point in the year. "Once we get a little further into the third quarter and we can see the light at the end of the tunnel, then I may consider it," said Schafer "At this point the Fed is not going to stop rising and buying on dips now would be a sucker's bet."
Schafer's portfolio is overweight asset backed's and commercial mortgage backed securities with allocations of 19% and 17%, respectively. He is underweight in agencies at 7% and neutral in mortgage backed securities' at 21% and credit at 40%. His benchmark is the Lehman Brothers Government/Credit Index, where his duration of 1.7 years is about six months short his benchmark.
