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| Ellen Cammer |
Cammer is managing director/senior portfolio manager and heads a team that manages $6 billion dollars of taxable fixed income at Smith Barney in New York. Cammer has been with Smith Barney or its predecessors since 1982. What is your general investment strategy?
We are underweight in the Treasury market, neutral the mortgage market and overweight corporates even with compression seen in spreads seen this year. But we don't cast our strategy in terms of sector allocation. We're more name-driven and issue-specific. We have a fair amount of financials because of the issuance in that sector, but we also invest in autos, telecoms and industrials. Individual corporate names would be 2-3%, with a solid single-A or double-A closer to 5%. Our average credit is double-A.
We're underweight in Treasuries to make room for our overweight in the corporate market, but we never exit the Treasury market. The story in the Treasury market has been a flattening trade, so we've been slightly underweight the long end. If you look at some of the Treasury indexes, the two-year has underperformed every other place on the curve, even three- and six-month bills, and has only been up 88 basis points year-to-date according to the Lehman Brothers Treasury Index.
We're in MBS but we're not playing a lot of esoteric issues. We use Ginnie Maes and Fannie Maes 15s and 30s. Our strategy is to have an allocation to that market and having liquidity in issues we own so we can shift our liquidity. We're careful that we have excellent liquidity, but we're not day trading.
How are you positioned in terms of duration?
We're slightly short from a duration standpoint to keep as much yield in the portfolio as possible. We're slightly defensive and being slightly short will be more than slightly painful. We are never more than 20% on either side of the benchmark with the belief that a strategy with lower volatility over a market cycle allows you to post attractive returns. Limiting the bands allows you to have a strategy that has lower volatility, which is as important to us as is sector weightings.
With corporate spreads at all-time tights, do you think spreads will head wider?
In the corporate bond market, spreads have tightened to their tightest levels since 1998. Unless you're concerned that spreads will blow out, we're content to own the sector. We don't think that the corporate sector will have much more to tighten. We would only add triple-B names if the market widened out.
How are you positioning your portfolio going into next year?
There's no strong pattern to growth and you can't seem to string three employment numbers together. The Federal Reserve is going to remove accommodation and the Fed will be data dependent. If we got to the point where we thought the pace would be faster, then we would become shorter. With the curve as steep as it's been, it has not warranted overall shortening of duration. As the curve flattens and gives up yield, we will shorten.
Our trades are always done on a swap basis. If we swap something in corporate sector, it's because we see the ability to add value to the portfolio. Thematically we will begin the year slightly short from a duration standpoint. We're about 4.2 years versus the Lehman Brothers Aggregate Bond Index's duration of 4.38 years.
Looking back on the year, do you think being short would have been more beneficial?
I would characterize the short trade as being slightly defensive. If you were short in March and April, you looked like a hero. But two months do not a year of returns make. It's not terribly usual to have the Fed move this many times and have the 10-year trading where it is.
If you move very early and very quickly and are very short early in the tightening cycle, then you're banking on a higher and higher back-up in yield. It's a timing issue. You could have a big month like you did in April with that carry trade people will have to unwind it, but it doesn't mean it you have to unwind it badly.