AMR Investment Services is looking to add up to $400 million in bonds of brokerage firms. It will sell U.S. government securities to finance the move. Bonnie Mitra, portfolio manager of $4 billion at the Dallas money management firm, says he wants to capture additional yield while guarding against the extreme volatility and credit risk that has plagued lower-rated corporate sectors, such as telecommunications. Mitra argues that brokerage firms are less susceptible to the kind of off-balance sheet accounting practices that have roiled the credit market in recent months because they mark their assets to market every day at the close of trading. The portfolio manager also says that brokerage firms, unlike banks, are not greatly affected by rising interest rates and a flattening Treasury yield curve.
AMR will focus only on double A-rated brokers and commercial bank-affiliated brokers, and was looking to add exposure last week. Mitra says the only thing that has prevented him from completing the trade is the difficulty of finding the issues in the secondary market. Bonds the firm owns and was looking to add last week include the Merrill Lynch medium-term floating-rate notes maturing on 4/7/04 (Aa3/AA-), which were trading at three-month LIBOR+18 last Monday. It will also look to add to its holdings of the Morgan Stanley floaters of 4/24/04 (Aa3/AA-), which traded a basis point tighter than the Merrill paper. Mitra says he is also looking at floating rate issues maturing within the next two years from the brokerage units of Credit Suisse First Boston and Salomon Smith Barney. Those bonds were trading slightly tighter than those of Morgan Stanley and Merrill last week.
The funds Mitra manages are slightly short their bogey, the six-month T-bill. He allocates 40% to corporate floaters, 20% to mortgage-backed securities, 12.5% to Treasuries, 12.5% to agencies, 10% to cash and 5% to asset-backed securities.
