Chris Mahony, portfolio manager at J & W Seligman, is planning to shift 20% of the firm's portfolio, or $400 million, from higher rated to lower rated investment-grade corporates. He says a stabilization of the stock market, as well as signs of the economy picking up in speed, will trigger the move. In particular, he will look at improvements in factory orders, industrial production and capacity utilization numbers. The rotation will consist of selling triple-A and double-A rated corporates. With the proceeds, he will buy single-A and triple-B names, he says. The anticipation is that, with the economic rebound, lower rated high-grade corporates will rally while the top of the spectrum will have offered its best returns, he says.
Mahony says his credit department is in the process of picking names, so he declined to specify future trades. Rather than using a spread target level for the purchases of the bonds, his credit group is focusing more on the analysis of companies or sectors that have been unfairly punished by the market. He cites the case of the energy sector, which has been beaten up after the Enron bankruptcy, and says that a name such as El Paso (Baa2/BBB) for instance, is attractive because a lot of their business is regulated. The same idea applies to the utilities sector, which has been painted with a broad brush. He will also consider industrial corporate bonds for purchase, he adds, because those will do well in a recovering economy.
On the selling side, Mahony mentions discount retailers such as Kohl's Corp (A3/A-) and Target Corp (A2/A+), as well as large banks such as Bank of America (Aa3/A), as potential prospects for liquidations because those names have gotten rich.
Mahony manages a $4 billion portfolio. He allocates 38% to corporates, 25% to Treasuries, 25% to agencies, 10% to mortgage-backed securities and 2% to cash. With a 5.30-year duration, the fund is neutral its benchmark, the Lehman Brothers government/credit index.
