Wilbanks, Smith & Thomas Asset Management is planning to increase its allocation to investment-grade corporates and has been adding to callable agencies, on the view that government bonds have peaked and the economy will pick up steam. Wayne Wilbanks, cio in Norfolk, Va., who managers $430 million in taxable fixed income, plans to increase corporates from 24% of its portfolio to 30-35%, and recently raised agencies 6% to 43%.
"Our top-down thesis is that we think we're in the final phase of the bull market for bonds," he notes. As a result, the firm wants to move more of its assets into higher-yielding spread product. "Spreads are still 100 basis points too wide in corporates," Wilbanks says, noting that short-term bonds of companies such as AT&T, AOL TimeWarner and Computer Associates offer good value.
For example, Wilbanks recently purchased the 7% AT&Ts of '05, which were at 300 basis points over Treasuries last Monday. He reckons they should be at 210-220 basis points over. Wilbanks plans to continue buying names such as these and others in the triple-B range. To fund the move, he will sell Treasuries and reduce them by 7% to 20% of the portfolio.
Wilbanks is a short-term manager and runs an intermediate duration product against the Lehman Brothers Intermediate Government/Corporate index and tends to buy debt in the three-year range. The manager is about 20% short the 3.7-year duration of its bogey.