Fischer Francis Trees & Watts will swap 4%, or $200 million, of the firm's $5 billion corporate portfolio from the financial sector to a mix of utilities and industrial corporates, to add more yield if signs of stability emerge. Those signs, which will trigger the rotation, include a quick and positive resolution of the conflict in Iraq, saysSai Choy, a portfolio manager at the New York-based firm. Another signal would be the stabilization of the unemployment rate. Choy says he expects to make the move by the end of April. He will retain a duration neutral strategy.
Choy wants to unload financial corporates to take profits as bonds in this sector have rallied in the low interest rate environment. He is considering selling the Wells Fargo 6.45% notes of '11 (Aa2/A+), which last Monday yielded 53 basis points over Treasuries. He bought the notes at 130 basis points over the curve a couple of years ago. He also may sell the Bank One 5.25% notes of '13 (A1/A-) or the Bank of America 3.87% notes of '08 (Aa2/A+).
With the proceeds, Choy will buy utilities and industrial names in a proportion he has yet to define. In the utilities sector, he owns and may add to the Dominion Resources 6.30% notes of '33 (Baa1/BBB+) trading last Monday at 163 basis points over the curve. He bought the notes at a 164 spread over the curve a few weeks ago. Choy likes this utility company because of its "integrated" capacity in electricity production, distribution to consumers and gas pipelines. He says the management is also "bond friendly" in that it pays close attention to ratings and does not just seek to maximize returns.
The firm is neutral its bogey the 5.66-year Lehman Brothers aggregate index.
