Aladdin Capital Management LLC is continuing to add to higher-beta corporate bond issuers such as the Big Three automakers and Comcast Corp, particularly at the long end of the curve, says Dale Spencer, one of the portfolio managers overseeing roughly $2.5 billion in taxable bonds. By "beta," it is meant a higher risk/return profile, relative to other corporate bond investments. He argues that the above-mentioned credits still trade at wider spreads than many comparably rated issues. He says accounting scandals of the last two years have caused companies to address issues such as high leverage and, in the case of the automakers, large pension liabilities. Spencer also points to a recent decision by Moody's Investors Service to affirm the rating on DaimlerChrysler as a sign that the ratings agencies may be getting some comfort with the auto sector.
Aladdin already has an overweight in the auto sector, and may increase that allocation by 5% if it sees signs that the economy is continuing to improve. "One concern we do have is that job growth is not what we'd like it to be. That could potentially become an issue over time," he says. Due to the steep slope of the Treasury curve, Spencer is particularly intrigued by longer-dated issues such as the General Motors 8.375% notes of '33, which were trading at 298 basis points over Treasuries last Monday. In the case of Comcast, he would add to the 7.05% notes of '33, which were trading at 132 basis points over the curve.
While Spencer sees little value in tighter-trading consumer products issues, an exception is the Miller Brewing Co. 5.5% notes of '13. That issue recently traded 17 basis points behind a comparable issue from Coors Brewing Co., the 6.375% notes of '12. He says he would trade in the Miller notes if they narrowed to within five basis points of the Coors issue.
The Stamford, Conn.-based institutional money manager does not follow a benchmark. It invests exclusively in credit, with some $600 million in high-yield and the balance in high-grade issues. The portfolio is completely hedged against interest rate risk.
