Mercantile Capital Advisors likes short-end Treasury Inflation-Protected Securities as a defensive position in a rising inflationary environment. Mark McGlone, senior v.p. and co-head of fixed-income at the Baltimore fund manager, which has more than $5 billion under management, sees inflation as a growing threat. "Inflation is more of a problem than many bond pros [think]," he said, adding he expects inflation to rise and TIPS to outperform nominal Treasuries.
Mercantile's fixed-income fund is benchmarked against the Lehman Brothers Aggregate Bond Index and is overweight TIPS and underweight Treasuries. It is also neutral agencies and overweight corporates. McGlone declined to quantify the fund's weightings.
Mercantile is overweight corporates because the sector has continued to perform well and McGlone said he thinks the technical picture for corporates remains strong. "Demand is still stronger than supply and corporations are still flush with cash. It's still one of the better performing sectors. That may change in 2005, but I don't see near-term deterioration," McGlone explained.
The fund is basically neutral its index with regard to industry allocations and the manager declined to highlight any particularly attractive sectors or credits. "I can't say I can get tremendously excited at these spread levels," he noted.
New cash will be put to work across the portfolio's existing allocations, which McGlone expects to maintain in the near-term. Mercantile's duration is 90% that of its index.
