Brandywine Asset Management is looking to reduce its exposure to investment-grade debt and trim its duration. Stephen Smith, portfolio manager of $2.75 billion in taxable fixed-income, says spreads on a number of investment-grade companies that had been struggling last year have rallied to trade even with or inside their historical norms, and he sees little opportunity for continued sizeable gains. Smith declines to specify which issues the firm will sell, but names it might unload include TXU Corp.,Electronic Data Systems and Boeing Co. It has already taken gains in bonds of AOL Time Warner, Household International and CIT Group, as spreads in those issues recovered from earlier wide levels.
TXU's 7% notes of '13 (Baa2/BBB) were trading at 202 basis points over Treasuries last Monday, while Boeing's 5 1/8% notes of '13 (A2/A) were trading at 103 basis points over the curve. The EDS 7 1/8% notes of '09 (Baa2/BBB) were trading at 207 basis points over Treasuries.
Smith says Brandywine will trade into shorter duration U.S. Treasuries, in order to reduce duration by a half-year to 3.0 years. He believes a full-blown recovery will soon be underway with growth of perhaps 4% or higher in the second half of this year. As a result, he wants to keep duration low to be able to reinvest at higher yields as interest rates rise.
At a duration of 3.5 years, the Wilmington, Del., money manager is well below the eight- to nine-year level it carried for much of the 1990's. Brandywine allocates 48% to U.S. Treasuries, corporates and high-yield, 17% to euro zone sovereign debt, 13% to Australia, 10% to Swedish debt, 7% to New Zealand and 5% to Canada.
