Bentley Myer, portfolio manager with William Blair Investments, says he is going to swap 5% of the funds he manages, or $25 million, out of Treasuries into corporates, on the view that the economy is bound to recover and that corporates will outperform Treasuries in 2002.
Myer notes that Treasuries have already rallied and with the prospect of a quicker recovery, it is now time to decrease exposure to this sector because spreads between corporate and Treasuries are narrowing. He intends to sell 10-year off-the run Treasuries and replace them with corporates with a similar maturity range in order to remain duration neutral. His potential corporate trades are single-A rated and have seven- to 10-year maturities. Myer says he does not favor any corporate sectors but tries to remain as diversified as possible between finance, industry and services. In finance, Myer likes Household International (A2/A) stressing the diversification of its business and the consistency of its earnings despite recent acquisitions. In the industrial sector, Myer likes Tyco International (Baa1/A) because he believes the concerns over its portfolio quality have been overblown.
For services, Myer says that an example of bonds that he recently bought is the AOL Time Warner 6.75% notes of '11 (Baa1/BBB+) at a 147 basis points spread to the 10-year Treasury. The bonds traded last Monday at 144 basis points over Treasuries. Myer says he likes this corporation because as the economy picks up, the advertising part of AOL's business should grow as well.
The Chicago-based firm has a $500 million portfolio with an asset allocation of 48% short term collateralized mortgage obligations, 37% corporates, 10% Treasuries and 5% cash. At a duration of 3.30-years, the fund is shorter its 3.70-year bogey, the Lehman Brothers intermediate/government corporate index.
