State Bank and Trust of Fargo is planning to invest up to $40 million of its fixed income assets in emerging markets. Greg Sweeney, portfolio manager, says he is planning to initiate a 10% allocation to emerging markets to diversify because he thinks the fixed-income market in the U.S. has run its course. State Bank and Trust (formerly Northern Capital Management) manages $400 million in fixed income. The bank has a 5% cash position and a 15% allocation to outside mutual funds with a concentration in short adjustable-rate mortgages among other assets. Sweeney plans to use cash to invest in emerging market debt and will then sell part of the portfolio's mutual fund allocation. He plans to allocate 11% to Russian debt and the remainder to funds that invest in Latin America. Sweeney says the new allocation should be implemented this month.
A majority of the portfolio (60%) is held in corporates, with a heavy focus on triple-As. Sweeney stays diverse in corporates and avoids being overweight in any one sector and only invests about 3-5% in high yield. He currently prefers the industrial and paper sectors and is already fully weighted in the bank and finance sectors, which are higher-yielding. He also invests 20% in agency bonds.
As part of a defensive posture, the fund has a duration of 3.25-3.5 years, well short of the 5.25 year-duration of its bogey, the Lehman Brothers Government Corporate Index. Sweeney states that the idea is to capture a higher coupon income but maintain short duration. As a result, the fund has the flexibility to sell out short-term bonds if interest rates jump.
