State Bank and Trust of Fargo is looking to add value in a tight corporate bond market by investing in first mortgage utility paper and industrials, said Greg Sweeney, portfolio manager of $250 million in investment-grade fixed-income. He noted the best value lies in first mortgage securities, or bonds that are secured with a utility's assets, where he said triple-B credits offer the security characteristics of having a double-A corporate. Sweeney explained rating agencies don't single out first mortgages from the ratings they assign to an entire corporation, despite the fact first mortgages are more secure. He declined to name specific first mortgage credits he is looking to acquire.
While first mortgages are Sweeney's ideal target, he is also adding industrials, which he defines as anything aside from financials and utilities, in the four-to-six year range of the curve. He highlighted recent purchases of debt from Archer Daniels Midland, Anheuser-Busch and PPG Industries.
Sweeney noted the limited supply has caused spreads to narrow, making it difficult to put money to work. "Treasuries are yielding 4.2% and inflation's at 3%, which gives a 1.2% real return. After taxes, it's nothing," he explained. Despite finding the industry rich, Sweeney said it's hard for him to take money off the table because the fund is fully invested and its duration already is quite short. The fund's duration is currently four years, which is almost 20% short of its benchmark.
Sweeney's portfolio is comprised of 10% in Treasuries, 20% in agencies and 70% in corporates; the fund's government allocation is capped out at 30%. Within the corporate sector, State Bank and Trust is 30% financials, 10% utilities and 60% industrials. He uses the Lehman Brothers Government Credit Index, but said he doesn't keep track of his sector allocations relative to the index. Sweeney buys mainly in the secondary market.
