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Midwest Buyer Looks For Utilities, Real Estate

Advantus Capital Management is looking to plough new cash into high-grade corporate bonds and structured finance assets.

Tom Houghton

Advantus Capital Management is looking to plough new cash into high-grade corporate bonds and structured finance assets. Tom Houghton, portfolio manager responsible for the credit portion of $1 billion in investment-grade fixed income, said he sees opportunity in the utility and real estate investment trust (REIT) areas of the corporate bond market. "Within the utilities, we've been focusing on operating companies that don't have a lot of generating risk, primarily transmission and distribution companies," Houghton explained, highlighting Pacific Gas and Electric, TXU Corp. and FirstEnergy as attractive credits. Within REITs he likes the stability offered by companies at the mid triple-B level. "We see value in off-the-run names like Pan Pacific Retail Properties and Healthcare Realty Trust," he said. Advantus is fairly overweight utilities and real estate but Houghton declined to quantify his positions.

Overall, corporates account for roughly 30% of the St. Paul, Minn.-based fund, making it 5% overweight its benchmark, the Lehman Brothers Aggregate Bond Index. "Despite tight spreads, we still think there's value in the corporate market over the next three to six months," said the portfolio manager, adding he believes corporate America remains fundamentally strong. Houghton noted companies have cash on their balance sheets and though he is concerned about the potential for share buybacks and other shareholder-friendly behavior, he still expects balance sheets to remain healthy. Adding to the positive outlook for corporate bonds is the technical picture, which bodes well due to a lack of supply and continuing investor demand.

Elsewhere, Advantus is also overweight commercial mortgage-backed securities and asset-backed securities, while it is underweight Treasuries and agencies.

Houghton buys in the primary and the secondary markets and plans to maintain his neutral duration. "The key to our success is we haven't tried to play the interest-rate game, we make money playing the credit game," said Houghton.

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