Trevor, Stewart, Burton & Jacobsen is putting new cash into Treasuries with maturities ranging up to seven years and short-term callable agencies, as it seeks to maintain a short duration across the board with the expectation of rising interest rates. Alan Kral, portfolio manager of $450 million in taxable fixed income in New York, says the fund average duration is less than four years while its benchmark, the Lehman Brothers Aggregate Bond Index, is in the high five-year range. The portfolio is run on a simple short-duration stance, on the view that duration will be the main driver of performance, Kral explains.
The purchases will be made to replace maturing securities and will not affect the portfolio's current allocations. The fund is heavily invested in Treasuries and agencies, at 55% and 30%, respectively. About half the allocation to Treasuries consists of inflation-protected securities (TIPS). Kral says he invests heavily in TIPS in anticipation of rising inflation and states that he is augmenting yield with short-term callable agencies, with a two year to two and a half year final maturity. Another 10% of the portfolio is in strips.
The remaining 5% is held in corporates and mortgages. Kral says he doesn't find corporates or mortgage-backed securities attractive due to the expectation for rising rates and the prospects of spread widening given last year's tightening trend. He says he has no plans to change allocations until rates rise. At that point, he will be looking for opportunities to change his allocation and to extend duration, although he declined to reveal any specifics.
