Chandler Asset Management is looking to shift some $20 million of its short-term U.S. agency holdings to a "butterfly" position--selling three-year debentures in favor of 1.5- and 4.5-year paper.Joe McCullough, portfolio manager of $1.3 billion in taxable fixed income, says the three-year part of the curve has often been expensive relative to 1.5- and 4.5-year maturities, and the firm will make such a "butterfly" trade in those instances. Chandler will also move $20 million out of U.S. agency debentures and into corporate credit. McCullough says the firm wants to pick up yield and position itself for an economy that is expected to improve.
The bulk of the corporate purchases will be financial credits. "Finance is still one of the best areas to be in credit-wise, both for its earnings potential and its ability to do well in a steep yield curve environment--and it seems the curve is getting steeper all the time," McCullough says. Recent purchases include the Bank One Corp. 6.5% notes of '06 at 27 basis points over LIBOR, or nine basis points below five-year Treasuries. Chandler also bought the Countrywide Credit 5.5% notes of '06 at LIBOR plus 67, or 55 basis points above the five-year note. McCullough says future purchases in the sector will depend upon what is available. Chandler may also look to high quality industrial names such as IBM Corp. and Wal-Mart Stores. In addition to the high ratings, McCullough sees the future prospects of the companies as strong.
At a duration of 2.20 years, the San Diego money manager is slightly long its bogey, the Merrill Lynch one- to five-year government/corporate index. It allocates 60% of its assets to agencies, 20% to corporates, 10% to Treasuries and 10% to cash and cash equivalents.
