40/86 Advisors is planning to use new cash to buy up to $30 million in commercial mortgage-backed securities because they lack the extension risk of residential mortgage-backed bonds and offer attractive spreads relative to corporate bonds.
John Saf, second v.p. and manager of a $600 million portfolio of external assets in Carmel, Ind., says the manager is taking its marginal cash and putting it into structured securities and corporate bonds. Although he doesn't have a target allocation for structured bonds, which now account for about 40% of the portfolio, he says he may increase the portfolio's weighting in the sector to 45%. "It's not really a restructuring, since we're not selling the existing bonds in the portfolio, but we're buying seven-to 10-year triple-A and seasoned mezzanine tranches of CMBS," he explains.
In investment-grade corporates, which account for about 45% of the portfolio, Saf plans to add single-As from the middle of the curve from financial institutions and insurance companies. "The curve is steep and it may flatten, and if it does, the pivot point will be somewhere between the five- and 15-year part of the curve," he reasons, adding, "plus, that's where our liabilities are." He says he will keep the sector's allocation constant.
Government securities account for 3-5% of the portfolio, with 1-2% in taxable munis and the rest in miscellaneous investments. The money is run against a composite of five Lehman Brothers indices. 40/86 has $25 billion under management.
