The Texas Permanent School Fund will put new cash to work in energy-related corporates and Treasuries, said Carlos Veintemillas, deputy chief investment officer at the $4.5 billion fixed-income fund.
Veintemillas noted high oil prices have resulted in strong cash flows for companies in the energy sector, explaining why the fund will increase its energy allocation. The fund attempts to stay close to its benchmark, the Lehman Brothers Aggregate Bond Index, and does not go more than 2% over or underweight a sector. "We're overweight Treasuries right now by about 2% because it's a good place to park money as rates go up," he added. The fund has tried to put money into liquid instruments to enable it to go back eventually and buy spread product easily, said Veintemillas.
The Austin-based fund is underweight mortgage-backed securities by about 1% because of the increase in prepayments, Veintemillas added. Meanwhile, the fund is about market weight the corporate sector. "Corporate spreads are too tight; there's not much room for them to go in," he said. But within its corporate allocation the Texas Permanent School Fund is overweight autos by 1-2% because there is value due to spread widening and volatility. "It's yieldier paper for its credit ratings," Veintemillas noted. The fund currently does not own any insurance paper, which has been hit hard this month due to New York Attorney General Eliot Spitzer's investigation of the sector.
Veintemillas said the fund's duration is 3% overweight that of the benchmark, a position which has recently helped it outperform, but by year-end expects to reduce duration to neutral.
