Fifth Third Investment Advisors is planning to rotate $450 million from agencies (one- to three-year Fannie Mae and Freddie Mac paper) into a combination of corporate and MBS, says portfolio manager Mitch Stapley. In spite of the equity market downturn, the portfolio manager believes that the 4.3% unemployment rate reflects a strong job market, affecting select segments of the economy, such as telecoms, but has not had a negative effect on the broader service oriented aspects of the economy.
Stapley will increase his corporate exposure by 10% of his existing allocation, or $300 million, focusing on more cyclical credits. Mitch likes highly rated auto and retail names such as Ford (A2/A), GMAC (A2/A) or Loews (A1/AA-), in the five-10 year maturity region, because he thinks the curve will continue to steepen. He has existing positions of $10 million in each of the following: 7.10% Northern Trust notes of '09 (A1/A+), the 6.35% Boeing notes of '07 (A2/AA-), and the 7.25% General Motors notes of '11 (A2/A). He will be looking at adding to these exiting positions. Stapley is confident that the Federal Reserve will have little reason to ease prior to its May 15 meeting.
Stapley also plans on adding up to an additional $150 million to his existing MBS portfolio, on the view that prepay risk has already been discounted on these bonds. To fund this reallocation, he is planning on selling $450 million worth of short- to intermediate-term (1-3 year) Freddie Mac and Fannie Mae benchmark paper.
The Grand Rapids, Mich.-based firm has a $3 billion portfolio with an asset allocation of 50% corporates, 20% agencies, 20% treasuries and 10% MBS. The duration, at 3.6 years, is roughly neutral towards its Lehman Brothers Intermediate/Government Credit bogey, whose duration is 3.5 years.
