Bob Smith, portfolio manager with Sage Advisory Services, says that, as the economy improves, he will rotate 10% of the portfolio he manages, or $200 million, from triple-A and double-A rated corporates into lower-rated corporate names rated either triple-B or single-A, keeping the overall corporate exposure neutral. The thinking behind this move is increasing corporate cash flows will lead to bond price recovery in his targeted sectors. He declined comment as to what a possible trigger would be for the move.
A trade under consideration is the sale of Abbott Labs 5 5/8% notes of '06 (Aa3/AA) which were trading at 46 basis points over the curve last Monday. With the proceeds, the firm would buy the Ford Motor Credit 6.5% notes of '07(A3/BBB+) which yielded 231 basis points, last Monday. A trigger for the trade would be some evidence from the rating agencies that Ford may be placed on positive watch, says Smith. All corporate trades are intermediate-term or below 10-years, as this maturity range constitutes the framework of the portfolio. On a sector basis, Smith would be inclined to liquidate pharmaceutical names that are typically rated triple-A or double-A in order to replace them by automobile names such as Ford, GMAC (A2/BBB+) or DaimlerChrysler (A3/BBB+), all set to benefit from an economic upturn.
Smith manages a $2 billion portfolio out of Austin. The fund allocates 40% to corporates, 35% to agencies, 18% to mortgage-backed securities and 7% to Treasuries.
With a 3.0-year duration, the fund is slightly shorter than its bogey, the Lehman Brothers Government corporate intermediate index, which has a duration of 3.40-years.