Advance Capital Management has been taking money out of longer corporates and putting it to work in agencies and high-yield, said Chris Kostiz, portfolio manager of $390 million in taxable fixed income in Southfield, Mich. "We're currently heavy in callable agencies because they offer good yield for that class compared with longer corporates," he explained, noting that the fund's primary concern is interest-rate risk. Advance Capital has been buying 15-year agencies with one-year call protection.
The fund's position is currently 10% callable agencies, 25% high-yield and 65% in long, high-grade corporates. Kostiz said he will take 2-3% out of long-dated, high-grade corporates and put it into the high-yield portion of his portfolio. "It's tough to put money to work right now, you basically have to pick your poison," he commented, noting that tight investment-grade spreads have translated into tight high-yield spreads. "We have a two-tiered high-yield market right now: double-Bs are tight and the junkier ones are trading wider," he stated. The fund has a quality floor and can't go below the single-B level. Within the corporate sector, Kostiz highlighted the paper and pulp sector as attractive, specifically Tembec Inc. He also mentioned the gaming sector as an area where investors are getting paid for their risk and said some of the investment-grade and high-yield finance paper is attractive. Kostiz dabbles in new issues but primarily buys in the secondary market.
Advance Capital is listed in Lipper categories as a triple-B fund but the fund doesn't really benchmark its sector allocation against the Lipper triple-B index because the index contains funds that invest in international bonds and derivatives, too. For its corporate allocation, Advance Capital uses several indices including ones from Merrill Lynch and Lehman Brothers to make sure it's in the same ballpark. The fund has scaled back on duration to about 8-10% and will continue to pare it to combat interest-rate risk. The fund's duration is currently around 7.75 years.
