American Express Asset Management plans to rotate $200 million of MBS into corporates because it thinks the economy is not as weak as widely supposed, especially with consumer demand bolstering sagging corporate profits, says Jim Snyder, portfolio manager with the Minneapolis, Minn.-based firm.
Snyder, who invests mostly in the AA-BBB corporate sector, just bought $20 million of the 6% Kellog of '06 (Baa2/BBB), a trade he considers a "nice conservative play." He believes the equity market has bottomed out and that many beaten up telecom stocks will bounce back, which is why he plans to buy into the telecom bonds. However, he is selectively bullish, and is staying away from European telecom which he says are more leveraged than their U.S. counterparts. He likes Qwest, AT&T Wireless, Verizon, SPC and, in an exception to his European aversion, Vodafone, because it is two times less leveraged than either Deutsche Telekom or France Telecom.
In order to finance the corporate move, Snyder is likely to liquidate up to $200 million of premium pass-through bonds, a move that will also allow him to lower his exposure to prepayment risk. In addition, the manager will lengthen the overall corporate duration from 10- to 30-year in order to get more yield with equal default risk.
The $4 billion portfolio has an asset allocation of 40% MBS, 32% corporate investment-grade, 15% treasuries, 6% cash, 5% agencies and 2% corporate high-yield. At a duration of 4.52, the fund is slightly shorter its benchmark, the Lehman Brothers aggregate whose duration is 4.68 years.