On the view that the flight to quality is over, Mercantile Capital Advisors is shortening portfolio duration and swapping out of treasuries and agencies into spread products, says Kevin Dachille, portfolio manager with the Baltimore-based investment firm. The manager--who calls his tactic a recovery strategy--anticipates the economic slowdown will end soon.
Dachille says treasuries have not performed well recently and could deteriorate further with upcoming tax cuts, which is why he has decreased his allocation by 4%. He adds agencies did well last year, but there is not much more potential for upside, because spreads have already come in. Agencies spreads are less attractive than for MBS and corporates counterparts, where he is increasing allocations by 7% each. The manager says he likes MBS due to the shape of the yield curve and because he is anticipating a refinancing slow-down.
For corporates, Dachille believes spreads will continue to tighten because of an anticipated economic recovery. However, he thinks corporate spreads have already gone halfway through their tightening move, which is why he will shorten his duration in the credit sector, moving out of the long term into the 10-year maturity range. He likes the consumer cyclical sector, in particular autos, where he owns the Ford Motor Credit Co. ( A2/A) 6.37%s of '29. He is contemplating buying the 6.62% Viacom Inc.(A3/A-) notes of '11.
Dachille manages a $750 million portfolio whose asset allocation is 42% MBS, 35% corporates, 11% cash, 8% agencies and 4% treasuries.
With a 4.20 year duration, the portfolio is short its benchmark, the Lehman Brothers Aggregate index, which clocks in at 4.66 years.
