Iowa Manager Eyes Triple-B Names, Adds MBS
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Investors Management Group (IMG) is looking to increase its allocation to triple-B credits if the recent corporate spread-widening continues. Jeff Lorenzen, who oversees a $3.5 billion taxable bond portfolio, says the firm has recently reduced its triple-B allocation to 10%, taking profits from the year-long rally in lower-credit quality issues. Its typical allocation to triple-Bs is slightly higher--at 10-15%. It will likely sell higher-rated corporate issues to raise money for the purchases, Lorenzen says. He had seen no opportunities for cherry-picking of triple-Bs as of last Wednesday, however.
In lowering its triple-B allocation, IMG sold Northwest Airlines' 7.068% notes of '16 at 74.25, and Adecco International 7% notes of '06 at 106.75. The firm has recently purchased France Telecom 9% notes of '11 and British Telecom 7.875% notes of '05. Lorenzen says IMG wanted to move into higher-rated credits to lock in profits, and was low on telecom exposure. Lorenzen went for European names because he is concerned about the effect of MCI's emergence from bankruptcy on U.S. carriers such as AT&T Corp. and Sprint Corp.
On the view that Treasury yields will remain in a trading range for the foreseeable future, IMG recently purchased some 10%, or $350 million, in mortgage-backed securities. MBS should outperform Treasuries a range-bound trading environment due to their added yield, Lorenzen says. To guard against extension risk, IMG has purchased 15-year collateral and balloon mortgages. IMG also purchased 5.5- and 6-year current-coupon pass through securities.
In its core portfolios, the Des Moines, Iowa investor allocates 38% to MBS, 26% to corporates, 14% to Treasuries and agencies, 17% to asset-backed securities and 3% to taxable municipals. It is 4-5% short its bogey, the 4.41-year Lehman Brothers aggregate index.