William Blair Investments will increase corporate exposure by 10%, or $150 million, in its portfolio by selling mortgage-backed securities. Bentley Myer, portfolio manager with the Chicago-based firm, says the recovery should lead to continued corporate spread tightening. He says the corporate rally will be sustained as the economy is improving and cost-cutting strategies have improved the outlook for corporate earnings.
Myer says he will add cyclical names, particularly in the industrial and service sectors, as those will benefit the most from an economic upturn. One potential purchase, he adds, is the Household Finance Corp. 8% notes of '10 (A2/A), which last Monday traded at 179 basis points over Treasuries. Myer says the spread was at 140 basis points a few weeks earlier, but that the recent widening, due to higher delinquency rates, should reverse soon and constitutes a good buying opportunity.
Myer adds that he will sell short-term mortgage-backed securities with a two- to four-year average life as those reflect the majority of the firm's holdings. Myer manages a $1.5 billion portfolio which allocates 47% to mortgage-backed securities, 30% to corporates, 13% to Treasuries, 5% to agencies and 5% to cash. With a 3.45-year duration, the fund is slightly short its benchmark, the 3.75-year Lehman Brothers intermediate Government/credit index.
