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Hawkeye State Investor Touts MBS, Longer Corps

Investors Management Group, a Des Moines, Iowa firm with $5 billion in taxable fixed-income assets under management, will rotate 4.5% of its assets, or $7.2 million, in its $160 million core fund to 7.5% Ginnie Mae pass-throughs, a move that the firm's other portfolios may replicate. Kathy Beyer, portfolio manager, says the firm has slowly been bringing its mortgage-backed allocation to a neutral position versus its benchmark, the Lehman Brothers Aggregate Index. Beyer expects the firm to be at a neutral position within the next few days. Beyer says she likes the 7.5% premium coupons because they have less extension risk than lower coupon pass-throughs, and she expects prepayments to slow as the refinancing index comes down. She likes Ginnie Mae paper over that of Fannie Mae and Freddie Mac because it is only slightly more expensive, and Fannies and Freddies sometimes have lower average loan balances and are paid off more slowly. Beyer also prefers seasoned mortgage pools, since they tend to prepay more slowly.

Investors Management Group has already added some longer-duration corporate names that Beyer believes have been oversold. Those include the El Paso Natural Gas 8.625% notes of '22 (Baa1/BBB+), which have widened some 50 basis points over the last six weeks due to its association with Enron. Beyer believes the El Paso paper is a safe play, as the natural gas company has hard assets, and is rated a notch higher than El Paso's holding company paper. Investors Management Group also sees value in enhanced equipment trust certificates of airline companies, since they are backed by aircraft, offering investors substantial protection in spite of the airline industry's troubles. It has added Delta Airlines 7.111% notes of '11 (A3/AAA), and may add another 1% to its overall corporate bond allocation. Going forward, Beyer likes basic materials names, including the paper and forest products sector, reasoning that the sector should benefit if lumber prices turn the corner. Beyer says the firm has not yet determined which companies look attractive in the sector.

At a duration of 3.9 years, the firm is short its benchmark, the 4.6-year Lehman Aggregate. It allocates 36% to corporates, 30% to pass-throughs, 14% to Treasuries, 7% to asset-backed securities, 6% to collateralized mortgage obligations, 4% to taxable municipal bonds and 3% to agencies.

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