Hartford Investment Management Company may cut back on corporates by $850 million by next year should the broader economic environment weaken. The investment manager may slash its overweight in triple-Bs by up to $500 million and trim its high-yield assets by $350 million, according to Nasri Toutoungi, portfolio manager with the Hartford, Conn.,-based investment manager. Toutoungi manages $5 billion in taxable fixed income in institutional third-party accounts and retail mutual funds.
Toutoungi said if gross domestic product growth slows to 1-2% and the Federal Reserve raises rates to 3.5-4%, he would cut back his 20% overweight in triple-B bonds to his index's weighting of 10% or less. GDP growth in the fourth quarter was 3.1%, and the Federal Funds rate was at 2.25% as of Feb. 1. Under the same scenario, he said he would cut back his holdings of high-yield bonds from 7% to zero. While the manager did not see the necessary conditions coming to fruition this year, he said a slowdown appears to be on the horizon for next year.
Toutoungi follows a core-plus strategy benchmarked against the Lehman Brothers Aggregate Bond Index that includes high-yield, emerging markets and non-dollar accounts.
Toutoungi has a 27% weighting to corporates versus 25% for the index. Within corporates, he is underweight the finance sector. "Financial companies typically do poorly in a curve-flattening environment because they fund at the short end of the curve and invest longer. But as the curve flattens, that arbitrage opportunity disappears," he said.
Toutoungi is underweight mortgage-backed securities but overweight commercial mortgage-backed securities because they are less sensitive to interest-rate movements and offer decent spread. The manager says the majority of his holdings are triple-A, and he's overweight first-mortgage utility bonds that give bondholders access to assets in case of bankruptcy.
The manager is also significantly underweight agencies at 1% compared to the index's 11%. Toutoungi attributed this underweight to his forecast of higher yields in Treasuries, in addition to the privatization noise circling Fannie Mae and Freddie Mac. "While that's a low probability scenario, agency bonds would suffer quite a bit price-wise," he said.
The manager is currently neutral duration his benchmark's duration of 4.22 years.
