Napoleon Rodgers, portfolio manager at Alpha Capital Management, says he wants to rotate 7%, or $14 million of the firm's $200 million portfolio, from mortgage-backed securities into high-quality corporates rated single-A or higher. The rationale is to bring corporate exposure, which is currently 22%, to just above the Lehman Brothers benchmark level of 28-29%. Rodgers wants to pick up additional yield but will selectively add higher-rated names as he fears that geopolitical developments will lead to a corporate sell-off with spreads "blowing out" for speculative paper. He will buy corporates in the three- to 10-year maturity range, and his buying target for single-A rated corporate bonds, which last week traded at 200-250 basis points over Treasuries, is 25 to 40 basis points wider.
Rodgers will finance the corporate purchases through the sale of Fannie Mae-or Freddie Mac-backed MBS in the 5-5.50% coupon range. One of his reasons for selling MBS is because those continue to rapidly prepay, reducing his overall duration. He wants to be positioned slightly longer than the benchmark in anticipation of a flight to quality produced by geopolitical events, as bonds longer than the benchmark in duration will perform better if interest rates decline. Examples of companies he owns fitting this criteria are Wal-Mart Stores (Aa2/AA), General Electric (Aaa/AAA), Citicorp (Aa2/A+) and Johnson & Johnson (Aaa/AAA). He says he likes those names because the companies are high profile and very well managed. He may consider adding to those positions, in particular to the General Electric 8.5% notes of '08, which yielded 108 basis points over Treasuries last Tuesday. He declined to be more specific.
The Detroit-based manager allocates 52% to MBS, 22% to corporates, 17% to Treasuries, 6% to agencies and 3% to cash. The fund has a 4.6-year duration, slightly longer than the 4.50-year Lehman Brothers bogey.
