California Shop To Swap Out Of Agencies Into Corporates
Melissa Parker, portfolio manager with Nelson Capital Management, says she will move 5%, or $10 million, of the firm's portfolio, out of agencies into top-tier corporates on the view that well-selected corporate names should perform well as the economy recovers.
Parker says the corporate sector has become bifurcated, adding that some names trade at very wide spreads while others are tight relative to Treasuries and that the difference is not always a matter of ratings. She will look at companies with large cash positions, consistent earnings and not a lot of debt outstanding. Another selection criteria is that companies have a good balance sheet, she adds. She will avoid the telecom sector altogether and banks such as Citigroup, as both have been exposed to accounting headline risk. A trade example could be the purchase of Bank of America's 4.75% of '06 (Aa2/A+), which were trading at 47 basis points over the curve last Monday. She says the bank has consistent earnings and a good management. She may also look into electric utilities as the portfolio is underweight in the sector.
Parker will finance the corporate acquisitions with the sale of agencies, which have had a good run and are trading at tight spreads over Treasuries compared to last year. She will consider selling all debenture issues from Fannie Mae and Freddie Mac. She says a potential example would be the sale of the two-year Fannie Mae, which last Monday traded at 30 basis points over Treasuries, tighter than the 34 basis point spread average of last year. Another example is the five-year Fannie Mae, which had a 40 basis points spread over the curve last Monday, tighter than the 54 basis point average spread of last year.
Parker manages a $200 million portfolio out of Palo Alto, Calif. She allocates 45% to agencies, 35% to corporates and 20% to Treasuries. With a 3.35-year duration, the firm's portfolio is slightly short its benchmark, the Lehman Brothers government/credit index, which has a 3.69-year duration.