 |
| Joe Balestrino |
Federated Investment Management has been reversing its overweight position to cyclical corporates and its underweight to financials on the view economic growth is slowing, according to Joe Balestrino, portfolio manager of $5 billion in fixed income in Pittsburgh, Pa. Federated uses a variety of benchmarks including the Lehman Brothers Aggregate Bond Index and the Lehman Brothers Intermediate Credit Index; Balestrino's portfolio had been roughly twice his index's weightings in cyclicals and he has reduced his position by half. "It's a reflection of two things: the economy is aging and valuations make it harder to make the overweight case," Balestrino said, explaining his move away from industrials such as mining companies and other economic-sensitive spots. For example, paper company Weyerhauser Co. is a name Federated has held a large overweight in. He has been adding banks back into his portfolio because he anticipates the yield curve is almost done flattening. Federated finds brokers less attractive due to lagging trading activity. Balestrino noted while he may pare the positions slightly more, he will not bring them fully to neutral. "Given I try to add value, that's probably not a career-enhancing strategy," he stated.
Federated has remained overweight the corporate sector overall given its macroeconomic viewpoint the economy is moving higher, albeit at a slower rate. "Corporate earnings will continue to surprise on the upside. No, not 20-25% growth, but we'll continue to see solid single to low double digit numbers," Balestrino said. In his multi-sector funds, the manager is halfway between neutral and fully positive with a 36% allocation to credit, relative to the 24% weighting of the Lehman Ag. Balestrino expects to maintain this allocation in the near-term.
Despite his overweight to credit, Balestrino is concerned about credit-damaging shareholder activism. "It is the risk in the market. The investment-grade corporate market has not been this healthy in a long time," he stated, noting companies' cash is more often than not being used for bondholder-unfriendly activity such as share buybacks and dividend payments. Federated is wary of companies that have done well, generated a lot of cash and have lagging stock performance. Balestrino highlighted Clear Channel Communications and Viacom as examples of such bondholder-unfriendly credits.
