At least two portfolio managers say they are planning to add to their corporate bond allocations in the coming weeks, despite a sustained rally over the last 14 months that has led to razor-thin spreads. Munder Capital Management is looking to put new cash to work in investment-grade corporates, according to Michael Vandenbossche, senior portfolio manager of $10 billion in taxable fixed income. And, Gartmore Separate Accounts may increase its already overweight allocation to corporate bonds if spreads nudge wider in the coming weeks on year-end related profit taking, says Dan Portanova, managing director and portfolio manager of $150 million in taxable fixed income.
The investors say corporate bonds still represent an attractive buy, even with tight spreads, particularly as the economy continues to heat up. Furthermore, last week's release of official third quarter gross domestic product growth of 8.2% underscores that it is a good time to take on corporate credit risk.
Specifically, Portanova points to Alcoa Inc. as an economically sensitive company that will likely benefit from a global upswing. With that in mind, Portanova says he would look to add some Alcoa bonds if the 6% notes of '12 widen to the low 50s over Treasuries, based on year-end repositioning. They were trading at a bid side spread of 45 basis points over on Nov. 24. Corporates now account for 57% of Gartmore's portfolio and Portanova says he could see raising it to roughly 65% level--compared to the sector's 50% exposure in the portfolio's benchmark, the Lehman Brothers Intermediate Government Credit Index.
Meanwhile, Vandenbossche says Munder Capital will use cash rolling in off mortgage prepayments to buy corporates, as well as asset-backed and agency securities, "across the spectrum." Munder, based in Birmingham, Mich., tends to invest in the higher end of the corporate spectrum and favors ABS because he views them as carrying similar risks as corporate bonds and expects they will benefit as the economy continues to heat up, according to Vandenbossche. He declined to name specific credits he would consider purchasing. Munder currently has as much as 45% of its portfolio in corporates and ABS.
The portfolio managers are not alone in their view that corporate bonds represent a good bet. CreditSights, an independent research house, last week put an overweight recommendation to high-grade corporates back on (see commentary, page 6).
Gartmore is also about 13% short of its index's 3.8-year duration based on expectations that the strengthening economy will lead the Federal Reserve to raise short-term interest rates. The firm, which is based in Irvington, N.Y., is partly owned by Gartmore Global Investments.
| Michael Vandenbossche |
| Dan Portanova |
