Wright Investors' Service, which manages roughly $1.5 billion in fixed income, may invest about $30 million of new cash in agency bonds if spreads widen, says James Fields, portfolio manager in Milford, Conn.
Fields says that while at 10% the firm is currently light on agencies compared to the 12% weighting of its benchmark, the Lehman Brothers Aggregate Bond Index, he may increase the current allocation by 2% to a neutral or slightly overweight stance based on what political rhetoric comes out of Washington concerning the government-sponsored entities. The ongoing debate about the implicit government guarantee afforded to the private companies may lead to wider spreads and an opportunity to buy. Fields says he expects to see a lot of back-and-forth activity over the next several years with regards to amount of leverage these agencies can have. Fields says he does not have a specific target for where he would buy agencies but that he is looking to take advantage of the kind of temporary spread widening that has often occurred with GSE paper in recent years.
The firm also allocates 36% to corporates, 4% to asset-backed securities, 15% to Treasuries and 35% to mortgage-backed securities. The fund is overweight corporates because he feels that spreads, while tight now, can tighten even further with the view of an improving economy. The fund does not hold any international or high-yield corporates and focuses the majority of its allocation on single-A and triple-B bonds. Fields prefers industrial and financial sectors and likes to own shorter, highly rated names in the financial sector to pick up additional spread over Treasuries. He states that with current low rates, a lot of stimulus with tax incentives and with the election coming up, he is happy staying overweight in corporates. He doesn't see an inflation risk and states that inflation should stay under control with the existing levels of productivity. The fund's duration is short its bogey--4.3 years compared to 4.6 years.
