First Source Corporation Investment Advisors Inc. is looking to add up to $100 million in spread product this quarter in a bid to add yield. Paul Gifford, portfolio manager of $650 million in taxable fixed-income, says the bulk of the purchases will be corporates, as stability in the equity and corporate bond markets over the past three months has convinced him that the downside risk is no longer as severe as it appeared last summer. Gifford sees no specific trigger for the trades. Rather, he says the firm will add incrementally throughout the first quarter.
Media and telecom are among the chief sectors where First Source will look to add exposure, because it is underweight in both industries versus its benchmark index.
The firm recently bought the AOL Time Warner 7.75% notes of '05 at 280 basis points over Treasuries, and may look to add exposure at a slightly longer maturity. He says Time Warner has solid content despite the troubles at the AOL division. He also likes Walt Disney Co., which he believes could be a nice recovery story if it resolves problems with its ABC television network property. In the telecom sector, First Source recently purchased Verizon Corp. bonds, on the view that they were among the safer investments in the sector. The firm will look to take on a bit more risk in telecom, but has not yet decided in which names it will invest, Gifford says. In general, First Source will target three- to five-year maturities for their potential to roll down the curve, selling government securities of slightly shorter maturities in order to add a bit to duration.
If First Source buys mortgage-backed securities this quarter, they will be well structured collateralized mortgage obligations with good prepayment protection, says Gifford. The firm will focus on seasoned rather than new issue paper, because the seasoned paper has already weathered spikes in prepayment.
At a duration of about 3.15-years, the South Bend, Ind. money manager is short its main bogey, the 3.68 year Lehman Brothers intermediate government/credit index. Sixty percent of the $1 billion in fixed-income is taxable, including 25% to agencies, 20% to Treasuries 15% to corporates and 5% to MBS.
