Midwest Buyer Expects Strong Recovery
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Strong Capital Management is putting money to work in investment-grade corporates, on the view that the economy is improving and other sectors such as mortgage-backeds are too volatile. Jay Mueller, director of fixed income in the Milwaukee suburb of Menomonee Falls, Wisc., says the manager of $15 billion in taxable fixed-income is maintaining overweight positions to investment-grade corporates. "We think there's better relative value in corporates," he says, adding he expects economic data in the coming weeks to indicate a fiscal turnaround. Investment-grade corporates account for up to 32% in Strong's portfolios, compared to a 27% weighting in the Lehman Brothers aggregate index, the most commonly used benchmark. Meanwhile, Strong is underweight on-the-run, current-coupon mortgages because prepayments are too unpredictable. "We are overall a little worried about volatility and extension risk in the mortgage market, and you're not getting paid enough to deal with that volatility," Mueller adds. He declines to name specific credits the firm will consider buying and selling, citing corporate policy.
In government-sponsored bonds, Strong typically runs its portfolios about 5% short of the benchmark, preferring instead to take on yieldier assets, according to Mueller.
Because of expectations the economy will prosper and short-term interest rates will be raised, Strong is marginally short at 95-97% of the index's 4.66-year duration. "Our bias has been short duration and overweight corporates; it's a bullish call on the economy," Mueller explains.