Westwood Management Corp. will move about 10% of its portfolio out of Treasuries and into corporate bonds between now and the end of the year in a bid to increase yield at a time when corporate spreads are close to historically wide levels. Mark Freeman, portfolio manager of $850 million, says the firm will also reallocate its Treasury portfolio by selling two- to 10-year Treasury notes and buying longer and shorter dated paper to prepare for a flattening of the Treasury yield curve.
Westwood will look to cyclical companies that stand to benefit as the economy improves such as Ford Motor Co. and General Motors. Both have seen spreads on their bonds widen more dramatically than the rest of the market in recent weeks. Freeman says he will look for paper maturing in five years or less to maintain low duration. Also, in the event that these companies do face a serious liquidity crisis, Westwood will not be stuck with the bonds for more than a few years at the worst. Freeman says it is difficult to say what will trigger his decision to buy the auto bonds. "First we have to get comfortable with the credit profile, and continue to analyze each new piece of data that comes out. Is there a specific day or time that I can pinpoint? I don't think so," he says. Westwood will also look to the new issue market, focusing on high quality, liquid issuers that provide a bit of incremental yield relative to Treasuries.
At a duration of 4.2 years, the Dallas, Texas money manager is short its principal bogey, the 5.5-year Lehman Brothers government/credit index. Westwood is modestly overweight Treasuries and agencies versus the index, which has a 36% Treasury weighting and a 20% agency weighting. Westwood is significantly underweight the 37% corporate weighting in the index. The firm's portfolio also includes a small mortgage-backed position and a small asset-backed allocation.
