Segall, Bryant & Hamill Investment Counsel is considering rotating funds out of its 3% TIPS allocation into agencies, said Greg Hosbein, portfolio manager of $1.4 billion in investment-grade fixed-income in Chicago. "If agencies are shrinking their balance sheets, there may be opportunity there," he explained, noting less new issue supply could signal spreads will tighten. Hosbein added he may sell some of his TIPS allocation, which has performed well recently, to finance the addition. The portfolio's agency allocation is currently 75% that of its primary benchmark, the Lehman Brothers Aggregate Bond Index; Hosbein declined to further specify what would trigger the allocation shift or its potential size.
Hosbein said he is also looking to add to his taxable municipal allocation, which currently sits at 3%. "It's a high quality, developing area of the market that has done well and is likely to continue to do well," he commented, explaining as the market is by and large unfamiliar with the taxable muni space and attractive yields can still be captured there.
Segall, Bryant & Hamill recently started to unwind its barbell duration positioning as it doesn't think this summer will bring as much Federal Reserve tightening. Furthermore, as Treasury yields have risen, Hosbein is more positive on the Treasury market. "We had a decent barbell structure with a big overweight on the long-end in Treasuries and high-quality corporates," he explained, noting he has recently added 10-year Treasury paper and 15-year discounted pass-throughs to unwind the position. "[The 15-year discounted pass-throughs] are high quality and yielding 5%, extension risk is already priced in and the middle part of the curve has backed up and we wanted the carry," the manager said. Hosbein is 50% underweight the Lehman Ag in Treasuries, with its underweight concentrated in the one to five-year range as he doesn't see value there with Fed tightening.
Hosbein's credit allocation is 36% versus his benchmark's 25%, with a preference for higher-quality paper in the 10-year-and-in range. He has recently sold some of his longer-term, triple-B paper to upgrade quality and in anticipation the yield curve will steepen but he is not planning to further change his corporate allocation. Hosbein is somewhat concerned with the potential for spread widening, primarily in interest-rate sensitive sectors like financials, and likes utilities as a defensive play for their ability to pass on higher energy costs. Hosbein's duration is currently 97% that of his benchmark.
