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| Paul Gifford |
First Source Investment Advisors is considering moving up to $100 million from asset-backed and mortgage-backed securities into credit. The move would constitute a 10% shift of its $1 billion investment-grade fund and would be done if credit spreads widen another 25-50 basis points, said Paul Gifford, portfolio manager in South Bend, Ind. The manager's weighting to triple-B corporates is currently half that of its benchmark, the Lehman Brothers Intermediate Government/Credit Index, on the view the higher-beta credits will be hit hardest when spreads do widen from historical tights. Gifford said he would add the lower-rated credits if and when spreads widen further and present buying opportunities.
Roughly 20% of First Source's portfolio is in MBS, another 10% is held in ABS and 5-10% is parked in Treasuries. That is significantly underweight the benchmark's 40% allocation. "The reason for the weightings is to get absolute return in a flattening curve environment. You're not picking up extra yield by going out the curve, so we're adding income," Gifford explained, estimating he's picking up an additional 50-100bps in extra yield. He said he is holding high-quality and liquid ABS paper so that he can easily move out of the sector if credit cheapens. Gifford said he is not concerned about prepayment risk in MBS. "With the flatter curve prepays are not as painful and can even be opportunistic," he noted.
Gifford's corporate weighting is neutral the benchmark's, as are its industry sector allocations. He is also neutral agencies. First Source's duration is 2.9 years, short its index's 3.6 years on the view interest rates will continue to rise.
