AXA Investment Managers is upgrading the credit quality of its portfolio and is planning to stay away from volatile corporate sectors such as autos and telecommunications, said Wayne Schmidt, senior portfolio manager of a $3.3 billion fund in Minneapolis. Most of the portfolio is benchmarked against the Lehman Brothers Aggregate Bond Index.
"We'll continue to own them, but we're staying away from volatile sectors," Schmidt said, referring to the fund's 40% overweight corporate allocation. AXA has 1/6 the auto allocation and 1/3 the telecom allocation of the Lehman Ag. "Telecom has performed well but if the market turns, it will be volatile," he added.
Schmidt said he owns corporates for their incremental yield from a maturation perspective but does not expect spread tightening to be a significant contributor to returns. "We realize the spread compression game is over," he stated. AXA is two times overweight the beverage sector and Schmidt highlighted Anheuser-Busch Companies, Miller Brewing Company and The Pepsi Bottling Group as attractive, stable names.
Schmidt added he is becoming increasingly concerned about volatility spikes because of event-driven shocks to the market from events such as share buybacks, tobacco litigation, rating actions and auto earnings. But with market technicals looking good with no new issuance, Schmidt noted it is hard to see how spreads would widen in the near term. "Until we see evidence of volatility increasing, we'll keep our overweight," he said.
AXA is also overweight mortgage-backed securities by 15%, neutral agencies and underweight Treasuries by 50% on a contribution-to-duration basis. The duration of AXA's portfolio is neutral that of the Lehman Ag.
