Jeff Lorenzen, portfolio manager with Investors Management Group, is looking to barbell 15%, or $600 million, of the firm's portfolio, in anticipation of a flatter yield curve. Over the next two months, he will reallocate intermediate-term securities into either short-term or long-term maturities, as barbell strategies outperform best when the curve flattens, he says. The strategy has no particular trigger but is based on the view that the economy will rebound, reshaping the curve to a flatter level given the curve's historical steepness, he says. Lorenzen plans to complete the repositioning of the portfolio by the end of June, well before August, when he predicts the Federal Reserve will begin to raise rates.
Lorenzen says the firm will sell $600 million in bonds from a variety of sectors with an average four-year duration. Out of this, 40%--or $240 million-- will go to long-term securities with a 10- to 11-year duration. The 60%, or $360 million, remaining will go to short-term securities with a one-year duration. This particular allocation is designed to keep the portfolio duration neutral, he says. The asset allocation will remain unchanged as well, as all securities, from corporates to mortgages, including Treasuries, will be considered for the barbell swap with the same names rolling into different maturities.
Lorenzen manages a $4 billion portfolio out of Des Moines, Iowa for his firm, a subsidiary of Amcore Investment Group. He allocates 34% to corporates, 30% to mortgage pass-throughs, 12% to Treasuries, 10% to asset-backed securities, 5% to collateralized mortgage obligations, 4% to taxable municipals, 2% to busted convertibles, 2% to cash and 1% to agencies. With a 3.98-year duration, the fund is 10% shorter than its benchmark, the Lehman Brothers aggregate index, which has a 4.55-year duration.
