Advantus Capital Management has selectively been moving down in credit quality in the hope of reaping larger total return gains. Tom Houghton, portfolio manager responsible for the credit portion of the firm's over $2 billion in taxable bonds, argues that a recovering economy and continued efforts by companies to pay down debt and address governance issues bode well for corporates long term. He is also encouraged by recent reports from large banking institutions such as Citigroup and J.P. Morgan that customer defaults are on the decline.
One sector the firm has targeted recently is wireless telecommunications. Advantus purchased $7.5 million of the Sprint Corp. 8.375% notes of '12, which were trading at 187 basis points over 10-year Treasuries last Wednesday. "They've done a good job reducing debt. Customer churn is up a bit, but not as bad as at some of the other players," he says. Advantus would likely sell the bonds if they tightened some 40 basis points, Houghton says.
Longer term, Advantus will lighten up on corporates once there appears to be little room for further gains. Houghton says he will look for option-adjusted spreads on the Lehman Brothers U.S. credit index to grind in to about 85 from last Wednesday's level of 101, before Advantus takes some profits and reduces its corporate allocation to neutral.
The St. Paul, Minn., firm is neutral to slightly short versus its benchmark, the 4.52-year Lehman aggregate index. It is overweight the index in corporates, commercial mortgage-backed securities, collateralized mortgage obligations and asset-backed securities. It is underweight Treasuries and agency debentures.
