Conseco Capital Management is planning to shave a bit off its investment-grade corporate allocation, and use the current tight spreads as an opportunity to move out of what it perceives as overvalued corporates and in to higher-quality structured products.
John Saf, second v.p. and lead manager of $600 million in external insurance fixed-income accounts in Carmel, Ind., says the corporate bond market appears to have gotten ahead of itself and he thinks now is a good time to shift into other sectors. "We're weeding out some of the riskier securities after the run up in price," he says.
In a $100 million fund he runs for a property and casualty provider, Saf plans to cut the 32% corporate allocation by a few percentage points and increase the weighting to structured products, which is now 25%, by buying assets such as 10-year commercial mortgage-backed paper. The shift will help the manager get out of lower-quality, unsecured bonds that had fallen below its investment guidelines and have since rebounded sharply. Tyco International, airline-, telecom- and utility-related bonds are among those CCM has sold or plans to sell. He points to 10-year AT&T Wireless paper, which has risen from 70 last fall to 118 last Monday. "We're not married to corporates; they are unequivocally overvalued based on their fundamentals, and now is the time to get back into compliance" with the clients' investment guidelines, he says. Saf adds the firm will also shift into higher-quality corporates rated triple-B and up.
The remainder of the portfolio is allocated roughly 20% to Treasury and agency paper, 15% to taxable and tax-free munis and about 8% to cash. The account is run against a composite of five Lehman Brothers indices and is marginally long although it tends not to make duration bets.
