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| Kris Kowal |
DuPont Capital Management is adding yield by investing in individual speculative-grade names in an expensive market. Kris Kowal, chief investment officer of fixed-income at the Wilmington, Del., firm, which actively manages $5 billion, said there are still opportunities in high yield. In fact, compared to all other sectors, he explained high-yield offers the best values through single-security selection. Still, he acknowledged with high-yield spreads around 350 basis points over Treasuries, the sector is hardly cheap across the board. DCM plays in high yield through a gradual approach by building its positions and establishing its comfort level with credits over time, Kowal added, highlighting Dynergy and Level 3 Communications as credits the fund holds for extra yield. The manager won't generally buy triple-C paper at par, but will wait for names to trade down before picking them up.
DCM is around 5% overweight corporates relative to its benchmark, the Lehman Brothers Aggregate Bond Index, due to the fund's 7-8% overweight in high yield. Kowal sees few opportunities in the investment-grade arena, where he said investors are not getting compensated for risk. The fund is overweight capital goods, natural gas and transportation. It is underweight bank and finance because Kowal thinks interest rates will continue to rise. He declined to quantify his sector allocations.
Kowal is around 5% underweight mortgage-backed securities, which he said are expensive and he expects to underperform in a rising-rate environment. Its duration is basically flat the Lehman Ag as the fund normally stays within a half-year duration bet. "Interest-rate bets are the toughest way to make money in fixed income," said Kowal. He expects to maintain his current allocations heading into 2005.
