Waddell & Reed is looking to sell some $30 million in Fannie Mae 6.5-year pass-through securities. Jim Cusser, portfolio manager of $1.1 billion, says spreads between pass-throughs and five-year Treasuries will not continue to tighten, because volatility is subsiding. Cusser has still not determined whether he will buy two- to five-year bulleted agencies or lower-grade corporates with the funds he raises. Cusser says he will look to Waddell & Reed's equity analysts and the stock market to see whether top-line corporate growth is translating into bottom-line profitability, given accounting worries at many companies. If he feels companies can translate the improving economy into stronger earnings, he will choose corporates rather than agencies. He would not specify a stock market level that would make him more optimistic about potential for corporate profits, and says only that he will monitor earnings announcements.
To the extent that Waddell buys corporates, it will aim to move from defensive names such as the Bristol Myers Squibb 5.75% notes of '11 (Aaa/AAA), and the Coca Cola 4% of '05 (Aa3/A+), into cyclical names that should benefit from a rebound. Examples Cusser mentioned include Dow Chemical, Dupont Chemical, Ford Motor Co., and International Paper. He will look at maturities of two-to five-years, relying largely on the views of his equity analysts to determine whether specific credits are likely to avoid accounting issues and post a profit.
The portfolio at the Overland Park, Kan. firm has a modified adjusted duration of 4.31 years versus one of its benchmark indices, the 4.49-year Lehman Aggregate index. It allocates 40% to corporates, 30% to mortgage-backed securities, 10% to agencies, 10% to U.S. Treasuries and 10% to a combination of asset-backed securities, CMBS and cash.
