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Texas Firm Targets Defensive Spread Products

Sage Advisory Services is planning to invest more in defensive products over the coming year, such as mortgages, asset-backeds and govvies.

Bob Smith

Sage Advisory Services is planning to invest more in defensive products over the coming year, such as mortgages, asset-backeds and govvies. The firm is looking at Ginnie Mae and Fannie Mae pass-throughs, adjustable-rate mortgages and any kind of indexed product such as Treasury inflation-protected securities, as well as possibly corporate inflation-indexed securities. Bob Smith, president and cio of the Austin, Texas-based firm, manages a total of $3.1 billion in assets, including approximately $2.5 billion in taxable fixed income.


The fund allocates 15% to TIPS, 35-40% to agencies and roughly 20% to corporates. The rest of the fund is made up of 15% in asset-backed securities, some CMOS, and pass through securities, such as Ginnie Mae, and up to 10% in short-dated cash such as money market instruments. The asset-backeds are a combination of home equity loans, auto loans and credit cards. The allocation to agencies excludes Fannie Mae and Freddie Mac, which Smith has reduced within the last 15 months due to the institutions' credit outlook and financial reporting concerns.

Within corporates, Smith is selective, stating that the market is fully valued. Smith invests in single-A bonds or higher, including core corporate holdings such as General Electric, American International Group and Verizon Communications. The firm has reduced its exposure to riskier auto names by about 25% of what they were two years ago, including reductions in Ford Motor Company with sales of approximately $30-50 million over the last several months. Corporate are market weight to the fund's benchmark, the Lehman Brothers government/corporate intermediate index.

Smith is playing defensively with the view that rates will move higher. He sees a barbell approach as a much more effective strategy to a bullet maturity stance.

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