BPS Associates, a Bloomington, Minn. manager with $800 million in taxable fixed-income under management, is seeking to add 5-10%, or $40-80 million, to its current mortgage-backed security allocation as it receives new money this autumn. Lew Coffey, portfolio manager, explains that because many of the manager's clients are agricultural banks, it regularly receives substantial new money in the autumn when farmers tend to take in most of their revenues. The MBS paper he favors is collateral mortgage obligation tranches, because it allows him to pick up additional yield, because many managers are not prepared to do the work necessary to understand the structure. That said, he prefers fixed- to floating-rate CMOs, because they have fewer variables and are easier to evaluate.
BPS has also been adding to callable agencies with maturities of less than three years, on the view that interest rates are unlikely to fall much further, allowing the firm to pick up additional yield without significant risk of the calls being executed.
BPS has also added $20-30 million of Sallie Mae weekly T-bill floaters, to get as much yield as possible out of short-term debt without being exposed to rising interest rates.
BPS does not follow a benchmark, but tends to keep duration between two and three years. It allocates 40-50% of its assets to U.S. Agencies, 25% to MBS and the remainder to municipals.
