William Blair May Shed Corporates

William Blair Investment Management may reduce its investment-grade corporate exposure in the coming months to take advantage of tight spreads and shift assets into other sectors it expects to outperform this year. Jim Kaplan, co-manager of the $260 million William Blair Income Fund in Chicago, says price appreciation will not drive performance this year as much as it did last year. "We're cognizant of the rally that's taken place in credit. Carry will be a much more important component of return rather than outright tightening, so yield is important," he says.

Kaplan says he doesn't have a specific timeframe or spread level where he might sell, but says the thinking is based on a broader view that corporate spreads are simply too tight. High-grade corporates account for about 30% of the income fund and Kaplan says he may seek to reduce that to 25% or so and plow the proceeds into mortgage- and asset-backed securities in the second half of the year. The firm uses MBS and ABS as a surrogate for short corporates and to pick up extra yield.

Kaplan mentions corporate issuers such as Comcast Corp., Sprint Corp. and AT&T Wireless as among those he would consider selling, not because of a negative view on the credits but rather because he thinks their potential to tighten any further is limited. "Last year was a monumental move in credit, maybe a once-in-a-lifetime move," he says. Kaplan adds: You're going to have to be happy to take singles, and maybe even bunt singles, and not home runs," referring to himself and other bond investors.

ABS and MBS account for a combined 57% of the portfolio and would be increased if Kaplan did sell corporates. "We feel they will be a little more meaningful this year," he says of structured products. The income fund uses the Lehman Brothers Intermediate Bond Index as a rough performance yardstick, but not as a strict benchmark. Treasuries and agency debentures account for roughly 10% of the fund with the remaining 3% held in cash. Kaplan was recently made a principal of the money management firm.