Fort Washington Investment Advisors is planning to go overweight investment-grade corporate bonds in the coming weeks, on the expectation that the corporate market is overly rich and spreads will soon widen and create attractive buying opportunities.
Tim Policinski, senior portfolio manager in Cincinnati, says the firm's $500 million Touchstone Core Bond Fund has recently reduced its corporate allocation to 38%, neutral the fund's benchmark, the Lehman Brothers Aggregate Bond Index. Now, he's waiting for bonds to cheapen, at which point he expects to invest up to $25 million, or 5%, back into investment-grade corporates.
"We expect to see some reversal, and if we see some modest widening, we would add on that," Policinski says. For example, he notes Ford Motor Credit paper due in 2011 was trading at roughly 335 basis points over comparable Treasuries, last Monday in from more than 500 basis points in just the last few months. Although he does not have a specific threshold, the buy-sider notes a slight back-up in spreads, which could be caused by headline risk, may prompt him to pull the trigger. He declines to name potential bonds he might buy. To fund the increased allocation, Fort Washington would likely reduce its already-underweight 24% government exposure. The benchmark is 30%.
Policinski is focusing on spread product because "last year was all about quality, and this year is all about yield," he notes. He's short duration with a contrarian view that another further rate cuts are unlikely. "We are at 45-year low on rates, and even though we might stay down here, there is a risk that we pop up, so we'd rather earn spread this year," he explains.
The remainder of the portfolio is allocated roughly 27% to mortgage-backed securities, 6.5% to commercial mortgage-backed securities and 1.5% to asset-backed securities. A transactional amount of cash accounts for the rest.
