Alliance Capital Management may continue shifting money into corporate bonds of telecom, cable and media companies, on the view that they will provide attractive yields in the coming months as the U.S. economy continues to improve and corporate spread tightening subsides. Larry Shaw, senior v.p. and manager of a $1.2 billion corporate bond fund in New York, says he has been adding 10- and 30-year paper from names such as AT&T Wireless and Sprint Corp. To fund the purchases, he has rotated out of bonds from utilities such as Public Service of Colorado. "We bought that at about 300 basis points off, and it's now about 95 over. [Utilities] have performed well and we're willing to ring the cash register on them," he notes.
Investment-grade bonds account for 80% of the portfolio, with junk bond exposure at 20%. Shaw says the high-yield portion has been the high-octane producer so far this year, but he expects the second half of the year to see less spread tightening. "Yield carry is going to be the name of the game," he predicts, which is why he is rotating into higher-yielding investment-grade names.
Overall, he expects the economy to pick up in the second half, but says this has already been factored into the corporate market. Still, he thinks names in telecom, cable and media could continue to tighten, while carrying high yields, because of a limited corporate supply calendar.
Shaw's portfolio is run against two triple-B corporate benchmarks, one from Lehman Brothers and another from Lipper. He's considerably short the Lehman benchmark's 10.9-year duration, with his duration at about 6.5 years, because he thinks interest rates will be higher at some point and to be that long would take on too much duration risk.
