Fischer Francis Trees & Watts has adopted an underweight position to the corporate sector after cutting its allocation in recent weeks, said Sai Choy, portfolio manager in New York. He manages $4 billion in high-grade corporates and the investment manager runs $40 billion in fixed income overall.
Choy declined to specify the amount he has sold off but said he thinks further price appreciation in corporates is unlikely. "It's a function of valuations. We expect spreads to move sideways this year. Given their run, the upside is limited," he explained. The manager uses more than 100 benchmarks including the Lehman Brothers Aggregate Bond Index and declined to quantify his corporate underweight.
FFTW expects to maintain its current allocations and thinks credit is relatively stable. The firm is putting new cash to work in the mortgage-backed securities sector. "Valuations at the long end of the curve are relatively stable and prepayment risk is not material," said Choy, adding the prospect for rate rises seems to be continuing.
Among corporate sectors, Choy said he has been investing in financials for fundamental credit reasons, as brokerages are reporting solid earnings and the recent surge in merger and acquisition activity bodes well for the sector. He declined to quantify his overweight to financials. Furthermore, Choy is concerned about the potential for share buybacks and other bondholder-unfriendly activities in the corporate sector, which he added is not a threat to financials. "Financials need to maintain their single- and double-A ratings to run their businesses," he stated, noting he thinks the sector is stable. He declined to highlight specific credits he finds attractive. Conversely, FFTW is underweight industrials as they are more vulnerable to shareholder-friendly behavior.
Choy recently slashed his utility weighting to neutral. "Valuations had run up toward the end of the year. Names that were 100 off are now 85 off," he stated, explaining he sees less of an upside in the sector. Many of the names he unloaded were triple-Bs, which he said have seen price appreciation and he is now underweight triple-B credits. The manager is also underweight cyclicals such as paper companies.
