The Texas Permanent School Fund is looking to increase its position in agency debentures, corporates and commercial mortgage-backed securities. It will make the moves using royalties from oil fields it owns and what could be $300-400 million in new money from equity holdings. Carlos Veintemilles, portfolio manager of $7 billion in fixed-income assets, says the fund's board will meet this week to determine whether to adhere to its allocation guidelines and shift equity assets to fixed income. Equities currently account for 59% of total assets, and the fund's board had earlier approved a 55:45 equity/fixed-income split.
Veintemilles says he would most like to add agencies in the 20- to 30-year sector, as the fund is underweight in the asset class relative to its benchmark, the Lehman Brothers Aggregate index, and Veintemilles expects yields to improve relative to Treasuries as new paper is issued. He says the fund will add up to 3% to its allocation if spreads to Treasuries widen some 10 basis points.
The fund will also look to add corporates in cyclical names such as Alcoa, IBM and General Electric, which Veintemilles believes will improve along with the economy. He declined to specify maturities. In addition to putting new money to work, the fund may look to sell certain defensive corporate credits, such as Safeway 10-year paper, which Veintemilles says has "had a good run" in recent months.
In the mortgage-backed arena, the fund favors well-structured PACs with a predictable prepayment history. Veintemilles says the firm has not yet determined how much in CMOs will be added.
At a duration of 4.9 years, the Austin, Texas-based fund is long the 4.54-year Lehman aggregate. Explaining the long position, Veintemilles says the fund prefers to take interest-rate risk to credit risk. It allocates 35% to Treasuries, 35% to MBS, 20% to corporates, 5% to agencies and 5% to asset-backed securities.