Brandywine Asset Management is playing defensively as it expects interest rates to rise this year, and is continuing to focus its attention on international government bonds. Stephen Smith, who helps manage $3.5 billion across 60 accounts in New York, says the firm has a bias toward commodity-driven countries that exhibit strong growth potential. Brandywine recently put new cash to work in Polish sovereigns, specifically the 7% bonds of '08, which now account for 5% of its portfolio. Poland's attractive fundamentals and low 2% inflation rate are among the factors that bode well for the bonds, he explains. Given expectations that rates will rise this year, Brandywine doesn't plan to enact major changes to its portfolio. Present allocations include 20% to Eurozone bonds, 13% to Swedish government debt, 7% in Norwegian bonds and 5% in British paper. Another 22% is invested in Australia and New Zealand govvies and 10% is in Canadian securities. The remaining assets are held in a combination of one-year Treasuries, short-term high-yield bonds and Brazilian securities. Brandywine doesn't invest in U.S. investment-grade bonds because spreads are too tight; instead, it prefers to hold fallen angels that offer more attractive yields. Smith says he holds debt of Nextel Communications, Crown Corp. and Xerox Corp., which he considers as companies that despite their junk status are run like high-grade businesses.
Smith says he plans to keep the fund short until later this when he may "reset the table" if and when the rate picture becomes clearer. The fund has a three-year duration, short the 5.5-year duration of its benchmark, a Citigroup index.
