Investor's Management Group may look to increase its exposure to collateralized mortgage obligations with premium coupons, on the view that rising interest rates will lead to extension risk. Kathy Beyer, manager of $5 billion in taxable fixed-income, says the firm may add up to 3% of its $160 million Core Bond Composite fund, or $4.8 million, to the asset class, while reducing its cash position. Mortgage spreads on PACs were 100-125 over Treasuries last Tuesday, and Beyer says she expects those spreads to widen, as corporate bonds investors who have sought safety in mortgages gradually shift out of the asset class. An additional 20 basis points of widening would trigger the move, she says.
On the corporate side, Beyer may add another $1-2 million to bonds issued by operating subsidiaries of energy pipeline companies. She says the assets of such companies are easy to sell in a liquidity crunch to pay bondholders. The fund recently picked up Transnational's 6.25% notes of '08 (Baa1/BBB+), which was 325 basis points wide of comparable Treasuries last Monday. Beyer would not comment on which credit she would buy, or what specific market conditions would trigger the trade. One issue the firm might sell to raise cash for the purchase is the J.C. Penney 7.375% notes of '08 (Baa2/BBB-). IMG purchased the bonds in November of 2000 at 56, and has watched them climb in value to 98.5 as of last Monday.
To prepare for a rising interest-rate environment, the fund has invested over one-third of its portfolio in maturities of less than two years. It recently sold four- to five-year corporate bonds to increase its holdings of CMOs with a 1.5-year average life by 1%, and added to its short-term asset-backed security holdings as well.
The Des Moines, Iowa money manager's fund has a 3.75-year duration versus its bogey, the 4.41-year Lehman Brothers Aggregate index. It allocates 35% to corporates, 33% to MBS, 12% to Treasuries, 10% to asset-backed securities, 4% to taxable municipals, 4% to cash, 1% to CMBS and 1% to agencies.
