State Street global Advisors, which runs E600 million in corporate credit from its London office, is scaling back its allocation to lower-rated telecoms and adding insurance names. Mahmoud El-Shaer, portfolio manager for corporate credits, says the rally in lower-rated telecom names is just about finished in names such as Deutsche Telekom and France Telecom. He is selling these in favor of higher rated names such as Singapore Telecom and Telstra, the Australian telco.
With the profits taken, El-Shaer has bought insurance companies, increasing the portfolio's weighting to neutral. He named German insurers Allianz and Munich Re as examples of names he has bought recently because they are showing improvements. Elsewhere in the portfolio, he has cut down positions in Ford Motor Company and Volkswagen because he thinks they have tightened too far.
Overall, El-Shaer says he's been decreasing his exposure to corporate credit, because he believes the recent rally is overdone. "I'm a bit surprised at where market technicals are and how strong the market has been. I think it has been supported by CDOs ramping up, which should continue over the next weeks," says El-Shaer. He expects more corporate issuance could lead to widening spreads.
The firm uses a variety of benchmarks, including the Salomon Smith Barney Euro Broad Investment Grade index, the Lehman Brothers Euro Aggregate, the Lehman Global Aggregate, the Merrill Lynch Sterling Corporate and the Merrill Non-Gilt.
