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Midwest Buyer Moves To Reduce Prepay Risk

27 Feb 2004

Fort Washington Investment Advisors plans to buy $800 million worth of high- and low-coupon gross-weighted jumbos to take on stable yields and convexity.

Scott Weston
Fort Washington Investment Advisors plans to buy $800 million worth of high- and low-coupon gross-weighted jumbos to take on stable yields and convexity. Scott Weston, portfolio manager of a $4 billion insurance company fund, says he is looking to sell traditional mortgage-backed securities and invest the proceeds into low-gross and high-gross coupon weighted jumbos, which don't have the duration risk of pass-throughs. He is considering a reallocation of the portfolio in the coming months to make it more liquid and predictable to meet the insurance company's obligations. Jumbos offer yield stability and predictable cash flows, reasons Weston, who also points out that the 15-year pass-through certificates carry a high duration risk in an uncertain environment and are not liquid.

The fund now holds 40% of its assets in 15-year pass-throughs, which Weston plans to reduce to half that level. He says jumbos are less sensitive to prepayments, making them safer in the current interest-rate environment. Currently, the fund allocates about 30% in low gross-weighted jumbo structured securities and another 30% in high gross-weighted structured jumbos; Weston plans to increase these levels to 40% apiece.

27 Feb 2004