Allmerica Asset Management is looking at buying MBS and select corporate credits, especially in the telecom sector, because declining interest rates and improved market conditions will lead to spread tightening, according to portfolio manager Ann Tripp. Tripp says the Worcester, Mass.-based fund just sold $5 million of 8.55% Abitibi notes of '10 (Baa3/BBB), in the paper sector, to take advantage of the attractive spreads in the telecom sector. One issue that she argues is compellingly valued is the recently issued 10-year 7.40% France Telecom notes of '11 (A1/A-), where she rotated into a $5 million position.
Declining to offer names of potential future acquisitions, Tripp indicates the fund may exhibit a bias towards U.S. telecom paper versus European issues, simply because information is more available on domestic products. She says the fund will not be looking at other corporate bond sectors in the near term.
On the mortgage side, Tripp likes Fannie Mae and Freddie Mac pass-throughs, and is moving up in coupon to the 7-8% area, because the market is too focused on buying current coupon paper. She acknowledges the prepayment risk, but believes it to be minimal because it is already priced in. Tripp reasons that in the short run, dollar prices may be getting cheaper, but longer term, she doesn't anticipate rates declining any further, and based on this assumption, she is looking for mortgages to outperform most indices. She neutralizes the risk of duration shortening of the portfolio by acquiring longer Treasuries or lower coupon MBS, with less prepayment risk.
The firm's portfolio allocation is 35% investment-grade, 35% MBS (including CMBS), 20% Treasuries, 5% agencies and 5% ABS. The firm uses the Lehman Brothers Aggregate as its benchmark and at 4.73% is slightly long the 4.5 year bogey.
