William Blair Mutual Funds is positioning its $270 million income fund to benefit from an improving economy while at the same time being prepared for an increase in short-term interest rates. Jim Kaplan, co-manager of the fund in Chicago, said it is maintaining a defensive, short-duration posture even in light of recent surprisingly low payroll figures. "we still feel the need to be defensive on rates notwithstanding what we feel is merely an interruption," he said, referring to the non-farm payroll data. The fund's duration is three years, compared to the 3.75-year duration of its benchmark, the Lehman Brothers Intermediate Government/Credit Index.
"Unfortunately everyone in the world is short," noted Kaplan, who said William Blair tries as a result to add value through sector and security selection. The fund's credit exposure is at about 30%. He said the fund is unlikely to add to its high-grade holdings and is more likely to take some off the table in the coming months. "The third quarter traditionally is a difficult time for the stock market and that usually translates into a more difficult time for corporate bond spreads." That being said, Kaplan stressed the fund is unlikely to make a major shift in allocations because demand, particularly from foreign buyers, seems insatiable for corporate bonds. "Taking profits is one thing but redeploying is another," he added, noting there's not much room left for spreads to tighten. "The technicals remain very good but the valuations are not nearly as attractive as they were a couple years ago," Kaplan noted.
Other large allocations for the short-duration fund, which is held by retail investors, are about 35% in agencies and more than 20% in asset-backeds. William Blair manages a total of $2.5 billion in fixed income, about $1 billion of which is in money markets.
