Lord, Abbett & Co. is planning on increasing high-yield exposure by $150 million on the view that spreads will tighten another 100 basis points over the course of the year and that credit products will outperform treasuries and MBS because the Federal Reserve easing will boost the economy. Chris Towle, portfolio manager, says the fund would reduce its investment grade and MBS exposure by the same amount.
Towle says the $2.5 billion high-yield portion of his fund averages B+ in credit quality and is underweight in telecom. He specifies that he will be in the market for telecom bonds, but mostly in the cellular sub-sector, where potential returns are best and where he perceives the overall risk to be lower. An example of his recent activity in this sector is the purchase of $5 million Roger Wireless 9.625% bonds of '11 (Baa3/BB+), with Towle adding that he may purchase additional paper. The manager also likes business services companies like Iron Mountain, a records service corporation whose debentures from varied issues represent $40 million of his portfolio. He just increased his position by buying the 8.625% notes (B2/B) of '13.
Towle also plans on selling his higher coupon mortgages. Right now, the bulk of his mortgage portfolio is made of 7%, 7.50% and 8% coupons. He believes those bonds have returned well year-to-date, but have a limited upside because they represent defensive investments, and with lower spreads in view, a defensive strategy does not make any much more sense. Towle will also be reducing his exposure in investment-grade corporates, focusing on sales on the shorter end of the curve in order to maximize his total return.
The $3.75 billion high-yield fund managed by Towle has an asset allocation of 65% in high-yield, 15% in convertible securities, 10% in MBS and 10% in investment grade corporates (BBB average quality.) With a duration of 4.82 years, the fund is longer than its benchmark, the Credit Suisse First Boston High-Yield index, whose duration is 4.27 years. He sees the corporate spreads tightening but does not anticipate treasury yield coming down or up by more than 25 basis points by year-end.
