Legg Mason Investment Advisors will sell agencies to buy $180 million in corporates and $100 million in mortgages-backed securities late in the third quarter, or fourth quarter, as the economy begins to improve. Mitchell Penn, who manages $2.7 billion for the Baltimore-based firm, believes that inventories have built up and as consumers begin purchasing again, manufacturers will begin producing. This, in conjunction with easing by the Federal Reserve, will lead to an upturn.
Penn will sell the agencies, which he used as a substitute for corporates and mortgages because they lack prepayment and credit risk, and buy high-grade corporates such as Ford Motor Company and other auto paper to overweight his allocation. He will also cover his short of premium coupon mortgages and buy cuspier coupons, bringing his exposure to neutral. Penn believes there is more negative news to come before the economy improves as consumers remain laden with by debt and layoffs have not yet been incorporated into the market. Compared with the Lehman Brothers Aggregate Index, on a duration dollar basis the portfolio is 33% Treasuries, 27% corporates, 21% pass-throughs 15% agencies, and 4% asset backed securities.
