AIM Capital Management, a manager of $5.5 billion in taxable fixed income, is planning to park new cash in spread product in the coming months, which it expects will outperform government paper in an improving economy and rising interest-rate environment. Bob Alley, head of fixed income in Houston, said AIM's $80 million total return bond fund will let its roughly 30% allocation to Treasuries and agencies dwindle by attrition to roughly 15% of the portfolio. On the other hand, he will increase the fund's allocation to investment-grade corporates and mortgages, from a combined 68% to roughly 85%.
"We could have rising yields and narrowing credit spreads, and in that environment mortgages tend to be relatively defensive," Alley said, noting he would buy 5.5% Ginnie Mae's. He added: "As the economy expands, better earnings may dictate improving credit ratings." As a result, AIM is looking to buy high-grade bonds in sectors such as cable and defense. He named Cox Communications, AOL TimeWarner and Raytheon as companies whose bonds he will look to acquire. Of Raytheon, a defense contractor, he says, "The environment for them is obviously helped by the idea that they have to provide new missiles now" given that so many have been used in Iraq.
The portfolio's duration is neutral that of its benchmark, the 3.5-year Lehman Brothers aggregate bond index. Alley said AIM plans to stay that way. "We don't see a lot of value added on the duration side; we're more likely to see the yield curve changing than a parallel shift of yields," he said.