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| Bob Smith |
Sage Advisory Services is executing a barbell strategy as part of its defensive stance in a rising rate environment. Bob Smith, president and cio of the Austin, Texas, firm, which runs $2 billion against the Lehman Brothers Intermediate Government/Credit Index, said he expects curve flattening to continue. As a result, Smith has positioned his portfolio in money markets, counterbalanced with the seven- to 12-year area, and avoids the belly of the curve. This strategy renders Sage's portfolio 15% short duration. Smith anticipates the Federal Reserve will continue to raise rates and the Fed Funds rate will hit 3 1/4% to 4% around the end of the year. Smith has been putting new cash to work in mortgage-backed securities, which he said is the most attractive sector in a bond market that is not attractive as a whole. Sage has a preference for pass throughs and is not concerned about prepayment risk. "I think collateral is fully priced for prepayment risk [in MBS]," he said, noting he is picking up an additional 125 basis points over Treasuries through his 10% MBS allocation.
Sage is 15-20% underweight Treasuries in order to pick up spread product. The bulk of its allocation to Treasuries lies in TIPS as a defensive posturing against expectations inflation will rise, noted Smith. The manager is market weight the corporate sector with a preference for single- and double-A names. Smith doesn't find triple-Bs attractive and said that area of the curve is fully priced. He is overweight finance paper with a 14% allocation. "If you look at large issuers, like the GMACs and Fords, they issue through their finance arms; financials are hard to avoid," he stated. Sage believes corporates are not especially attractive at the moment and won't be increasing its allocation to the sector in the near-term.
Sage's cash levels are currently at 5-6%, which Smith said is higher than average as part of its defensive positioning and because there currently isn't very much attractive paper to buy. He mentioned he does not own any Fannie Mae or Freddie Mac debentures because he is concerned about headline risk and credit quality.
