Wayne Schmidt, portfolio manager with Advantus Capital Management, is going to swap $70 million, or 7% of the firm's portfolio, out of Treasuries into corporates, on the view that corporate spreads will tighten as the economy rebounds. He says there is no particular trigger for such a move, and selection will be made on a credit-by-credit basis. However, he notes that the recent strength in the equity market is an indicator of a potential rebound.
Schmidt declines to be specific about future trade plans. But, he points to three sectors he favors: paper and forest products, Real Estate Investment Trusts and investment-grade utilities. He says the paper and forest products sector is a good cyclical play that should perform well as the economy rebounds. He likes REITS for their stability and relatively high coupons. In addition, he is interested in buying select utility paper, especially those bonds issued from regulated companies, because their spreads are less volatile than those issued out of the unregulated segment of the utilities sector.
Schmidt manages a $1 billion portfolio out of St Paul, Minn. The asset allocation is 30% corporates, 20% agency pass-throughs, 20% non-agency mortgage-backed securities, 15% Treasuries, 8% commercial mortgage-backed securities, 5% agencies and 2% asset-backed securities. With a 4.49 year duration, the fund is neutral its benchmark, the Lehman Brothers aggregate index.
