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| Cyril Theccanat |
Smith, Graham & Co. Asset Management is rotating money out of its corporate bond allocation and into mortgage-backed securities in a relative value play aimed at picking up additional yield and upgrading credit quality. Cyril Theccanat, executive v.p. and managing director of fixed-income at the Houston-based manager, said it recently sold General Dynamics paper and moved into triple-A commercial mortgage-backed securities. The trade generated around 23 basis points in yield. Smith Graham is looking for similar upgrade type situations, though Theccanat declined to quantify the amount of money the firm would like to move from corporates into MBS. Smith Graham has around $2 billion in fixed-income under management, about half of which is benchmarked to the Lehman Brothers Aggregate Bond Index. On a dollar-duration basis, Theccanat is three-tenths to half a year underweight credit on the view spreads are tight and are more likely to widen than tighten.
"While companies over the past several years have been de-leveraging balance sheets... and building up cash, the types of things companies are doing are not going to be bondholder friendly," Theccanat explained, noting activities such as share buybacks, dividends and the pickup in merger and acquisition activity are troublesome from a credit perspective. "There are only certain sectors where you can pick up yield, like autos and airlines, where you can pick it up for a reason," he quipped, noting he finds few attractive opportunities in the corporate arena.
Theccanat is offsetting his underweight in credit with an overweight in MBS, where he is two-tenths of a year overweight. He noted he also likes 30-year discount coupon MBS paper and thinks increased foreign buying of MBS will continue to support the market. Overall, Smith Graham's duration is roughly neutral that of its benchmark.
