Nelson Capital Management is seeking to increase its duration via the purchase of longer maturity corporate bonds, on the view that the already-steep curve is likely to flatten, says portfolio manager Melissa Parker. Parker also notes that another reason for the move is to reach neutrality with the Lehman Brothers Inter Government credit index, as the firm is currently slightly short its benchmark. She plans to execute the shift by moving long the curve from a current five- to seven-year average maturity range to a 10-year range.
Nelson has reduced her portfolio's treasury allocation over the past few months from 35% to 20%, and plans to keep it at this allocation level because the fund needs the liquidity offered by government bonds. Parker says that she likes spread products (particularly agency and corporate bonds) because of the attractive yields. However, instead of rotating from one sector to another, Parker wants to increase the corporate duration initially, viewing the 10-year sector as an attractive place to start, given the alluring yields there. The average credit quality of the firm's corporate allocation is Aa1/AA+. Parker declined to indicate the average corporate maturity, but says that the entire portfolio's average term is 4.2 years.
Parker mentions that she will keep the same issuers by simply extending maturity. Parker plans on rotating Citigroup (Aa2/AA-) 5.70% of '04 or the 6.20% of '09 into the 6.50% of '11. She will also contemplate rotating the Target Corp. (A2/A) 7.50% of '05 into the 7.50% of '10.
Parker manages a $100 million portfolio with an asset allocation of 40% corporates, 40% agency debentures (Fannie Mae,Freddie Mac and Federal Home Loan Banks) and 20% treasuries. With a 3.40 year duration, this portfolio is slightly short its benchmark, the Lehman Brothers Inter Government credit index, whose duration is 3.68 years.
