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| Tom Marthaler |
ABN AMRO Asset Management expects to shift funds out of corporate bonds and into higher quality securitized products such as mortgage-backed, asset-backed and commercial mortgage-backed securities over the next three to six months. Tom Marthaler, director of fixed income at a primarily investment-grade $18 billion fixed-income fund in Chicago, said he may take profits if corporate spreads tighten even further in the coming months.
ABN AMRO currently has a 130% overweight to credit and is neutral the securitized sector versus the Lehman Brothers Aggregate Bond Index, which ABN AMRO uses as a benchmark for about half of its $18 billion portfolio. Marthaler noted the fund may move to a 10-25% overweight in securitized products, which he said are attractive in a low volatility environment, by shifting funds out of corporates. "If rate volatility decreases and the curve flattens, then we expect the securitized area of the market to do well, especially relative to governments," he stated. As it rotates funds out of corporates, ABN AMRO will upgrade the quality of its credit allocation. "We've seen strong triple-B performance recently, but we will look to move up the credit curve," he said.
Marthaler emphasized the fund will maintain its overweight in credit based on what he expects will be continued improvement in corporate earnings. "We think corporates will continue to provide better returns in a slightly higher interest-rate environment," he said. Industrials are ABN AMRO's most significant overweight at 200% overweight the sector's allocation in the Lehman Aggregate. "We like industrials because we see the most significant earnings growth there," explained Marthaler. He highlighted Kraft Foods and YUM! Brands as particularly attractive credits.
ABN AMRO is 75% underweight financials because Marthaler does not think banks and other financial institutions will experience earnings growth as fast as companies in other sectors will. ABN AMRO is underweight Treasuries by 50% and its duration is 98% that of its benchmark.
