AMR Investment Services, a manager of $4 billion in taxable fixed income, plans to reduce its exposure to mortgage-backed securities and add to corporates, on the view that prepayment risk remains too high and credit quality among finance-related corporates is improving. Bonnie Mitra, senior portfolio manager of $2 billion in Dallas, says he may eliminate its 3% MBS exposure altogether, through attrition and sales of up to $60 million in MBS. He'll then use the proceeds to buy a like amount of short-term corporates, raising the account's allocation as high as 43%.
The MBS portfolio is comprised of Fannie Mae and Freddie Mac debt carrying 5-5.5% coupons, which he quips are essentially "zero average life these days," and are forcing the portfolio to keep reinvesting at contemporary rates. "We bought these at premiums, and they had a lot of bands to keep average life in check, but those bands have long since been broken and we're getting par for them," Mitra explains. As a result, he's already reduced the MBS exposure from over 10% and will continue to do so.
On the flip side, Mitra is raising his short-term corporate exposure, in single-A and higher names, on the bet that the Federal Reserve will not raise interest rates anytime soon. He recently bough two-year paper of Bear Stearns, Goldman Sachs and Household Financial, which is owned by HSBC, and is looking to buy more names of similar quality. Mitra reasons that banks and securities firms are subject to greater regulatory scrutiny than companies in other sectors and are thus more accurately valuing their assets. Mitra notes the Federal Reserve monitors the balance sheets of banks and securities firms, ensuring they mark-to-market their assets, and he finds comfort in the transparency. "We don't see too much potential malfeasance in the sector; we don't know what's out there in terms of accounting in other sectors," he says.
The remainder of the portfolio is allocated about 40% to agencies, 6% to asset-backeds and the rest to cash. AMR, the parent of American Airlines, also manages external money. This account is run for an airline Mitra declines to identify, though he notes its focus is short-term and it's benchmarked against the Lipper Ultra Short Fund Index.
