Scott Stone, portfolio manager at Kansas City Life Insurance Co., says he will rotate $45-67.5 million, or 2-3% of the firm's portfolio, into mortgage-backed securities and high-yield bonds. The firm's allocated cash reserve will be used to finance these purchases. There is no particular trigger for this move. Stone says that his low cost of funds is central to his decision to add MBS, but declined to elaborate further. The rationale for increasing the high-yield exposure lies in his desire for added yield. He will make the move by buying double-B secured bonds.
Stone says he will buy collateral mortgage obligations as part of his MBS acquisition strategy. He will look at paper backed by discounted collateral, trading in the 90-96 range with 5-5.50% coupons. He will buy CMOs backed by Ginnie Mae midgets and Fannie Mae dwarves. His rationale for selecting a 15-year final maturity is because he wants to limit extension risk as he sees interest rates heading up next year.
Stone declined to provide specific examples for his high-yield picks, but says he will look into two sectors: airline enhanced equipment trust certificates and power companies that offer secured project finance bonds.
Stone manages a $2.25 billion fixed-income portfolio out of Kansas City, Mo. He allocates 60% to investment-grade corporates, 25% to MBS, 8% to high-yield bonds, 2% to agencies, 4% to cash and 1% to Treasuries. With a 4.25-year duration, the fund is long its bogey, the 3.90-year Lehman Brothers aggregate index.
