In a bid to pick up yield, Brandywine Asset Management is moving 7% of its assets, or $175 million, into select corporate credits that have been hit hard by recent negative headlines. Stephen Smith, executive v.p. and portfolio manager overseeing $2.5 billion in taxable fixed-income, says firm is looking at credits trading at a significant discount relative to their historical prices and to where they would trade in a normal economic environment. Names the firm is looking at include Household International, CIT Group, Verizon Communications and Electronic Data Systems. The firm is selling 30-year French and Italian sovereign debt and using paydowns from inverse floating-rate mortgage-backed securities to finance the purchases. Smith says he expects the move to be completed within the next week or two, as Brandywine is already in the market looking for bonds.
Discussing EDS, Smith says he is convinced that the worst news is already out. While there may be "a few bumps in the road" and even a potential downgrade, he argues that "EDS has very, very long-term contracts and analyzable cash flow. The stock has gone from $70 to $14, but it still has a $7 billion market cap." Specifically, Brandywine was looking at the 7.125% notes of '09, (A1/A+) which were bid at 93 last Monday.
Brandywine has been reducing its duration from nine years to neutral versus its bogey, the 5.75-year Salomon Smith Barney global government bond index. It invests 48% in sovereign debt of countries using the euro, 20% in Australia and New Zealand, 13% in Sweden, 10% in inverse floating-rate mortgage-backed securities, 6% in Norwegian sovereigns and 3% in U.S. corporates.
