Allied Investment Advisors, a manager of $1.5 billion in taxable fixed income, plans to curtail its investments in asset-backed securities and increase its allocation to mortgages. The strategy shift is part of a broader view that spread product will outperform in the coming months. Wil Stith, portfolio manager in Baltimore, says he wants to increase the firm's allocation to non-government paper because their higher coupons would help offset any interest-rate hikes. And he adds ABS paper is expensive and he can find better value in mortgages.
For example, Stith says two-year ABS paper from the likes of Ford Motor Credit is trading at about 10 basis points over six-month LIBOR, a level he deems too rich given concerns about the automaker's finances and broader questions about the state of the economy. "I definitely have interest at plus 15 or in the high teens, but not at that level," he says, adding, "we're not going to be going up to the trough with Ford as aggressively as we have before." Instead, Allied will use new cash to buy 5.5% 15-year and 6% 30-year conventionals from issuers such asFannie Mae andFreddie Mac. Mortgages are also more attractive because he said prepayment risk should decline if and when rates rise.
Stith notes Allied plans to make a 10% haircut to its ABS position, which was as high as roughly 20% of a $300 million fund benchmarked against the Lehman Brothers government/corporate index--which has no ABS. Mortgages have already increased in Allied's fund from 5-7% to 10-12% and will continue to rise as Stith puts new cash to work. And as part of the spread product bias, Stith has also let the portfolio's 20% bucket for Treasuries decline to 12-15%, and he'll let it get down to 5-7%.
