Patience Pays Off At Principal
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Patience Pays Off At Principal

Principal Global Advisors is adding to its already overweight allocation in mortgage-and asset-backed securities on the view that the economic recovery will be slow, says portfolio manager Marty Schafer. Schafer, who oversees $7 billion in assets, says purchases for the portfolio's core overweight in MBS pass-throughs and ABS will be made primarily on "short-term sell-offs." His affection for MBS is predicated upon what he says is the sector's low volatility, high-liquidity and excellent carry. Moreover, he adds that "the GSE's are continuing to grow and banks are continuing to add to their retained portfolio's--there isn't a coupon that isn't well-bid or a [dollar] roll that isn't at fail." In respect to ABS, Schafer says he will continue to buy triple-A "major issuer" credit card and auto-receivable paper "on every dip." He declined to name specific issuers, noting, "I'll buy them all, since my only real risk is in short-term price swings."

At present, about 45% of Schafer's portfolio is in MBS, entirely in pass-throughs. Within the sector, he says 5% 15-year conventional and 5.5% 30-year bonds remain his favorite. He says that he doesn't distinguish between Fannie Mae and Freddie Mac securities when purchasing bonds, with new positions financed by selling Treasuries or taking profits in slightly premium MBS coupons.

The Des Moines, Iowa, asset manager has an asset allocation of 45% MBS, 20% corporate bonds, 15% Treasuries, 8% agencies, 8% ABS and 4% commercial mortgage-backed securities. The portfolio used multiple benchmarks, though Schafer says "we are generally about 10 basis points long most of them at this point."

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