Merrill Lynch Investment Managers (MLIM) has been selling telecom paper, while adding cyclical names with stable cash flow on the view that investor sentiment is improving, but confidence is still shaky regarding the macroeconomic picture, corporate profits, and the ability of companies to execute their business plans. John Burger, manager of the firm's $1.45 billion corporate total return portfolio, says MLIM recently sold $10 million in telecom names such as the Vodafone 7.75% notes of '10 when they were at 128 basis points over Treasuries because the telecom sector does not have stable cash flow. It added $20 million in cyclical sectors, such as autos, lodging and leisure. Those include the Starwood Resorts 7.375% notes of '07, and the Cendant Corporation 6.875% notes of '06. The Starwood bonds were 292 basis points over the curve at the time of the purchase, while the Cendant paper was at 325 over Treasuries.
Because the market has been wary of larger companies with high historical growth rates, MLIM swapped out of the AOL Time Warner 7.7% notes of '32 when they were 242 basis points over Treasuries, while picking up $5 million in Comcast bonds. The basis for buying Comcast was due to its stable cash flow and the fact that the cable sector has been beaten up of late. MLIM also sold $3.75 million in Williams Companies bonds, swapping into El Paso Corporation bonds on the view that the latter company has more stable cash flow.
The firm has also sold $15 million in real estate investment trusts of longer duration than three years, while buying shorter duration REITs to take advantage of a flat credit curve within that sector. Burger declines to discuss his strategy going forward.
On an interest rate duration basis, the funds managed by Burger are neutral the Lehman Brothers credit index at 5.54 years. They are 2% long the 5.55-year spread duration of the index.
