Transamerica Investment Management, which manages $3 billion in taxable fixed income, is planning to reduce its exposure to investment-grade corporate bonds while still maintaining an overweight allocation to the sector. Heidi Hu, senior v.p. and head of fixed income in Los Angeles, says the firm will take profits on its $2.4 billion core composite product by selling corporates and investing the proceeds in on-the-run Treasuries across a variety of maturities.
"We think the bulk of the [corporate] rally is behind us, but corporates at a minimum will maintain their spread," she says, explaining why the firm will only shave about 10% off its roughly 75% corporate bucket. That's a steep overweight compared to the 44% corporate allocation of the product's benchmark, the Lehman Brothers Government/Corporate Bond Index. Hu reasons that despite their recent run, corporates remain attractive because of a limited new issue calendar and improving credit quality.
Meanwhile, Transamerica will also swap out of some corporate names and into others that either are higher-rated or offer better yields while carrying the same risks. In a recent trade, it sold Indiana utility NiSource's 6.15% bonds of '13 and bought Comcast's 8.375% notes due the same year, picking up more than 40 basis points in the process. The bonds are both rated triple-B. "We think they are of similar risks, but Comcast offers better yield," Hu says.
The composite product is neutral the benchmark's 5.5-year duration. Hu says Transamerica does not usually make large bets on duration because it feels it can find more pricing inefficiencies in the credit markets.
