Wayne Wilbanks has been a portfolio manager for 18 years, 13 of which he has spent at his current firm in Norfolk, Va. He also spent time on the sell-side as an institutional and retail broker at Smith Barney. The firm manages $1 billion in total assets, with just under $425 in taxable fixed-income. Exposure to corporate bonds accounts for 26% of the firm's fixed-income portfolio. Its clients are high-net-worth investors and small institutions. Describe your investment philosophy.
The core of our portfolio has traditionally been in a combination of corporates and agencies. What I mean by core is it's pretty much on the benchmark, seeking above average income. So we tend to buy the triple-B area on the corporate side and we tend to buy securities such as callable agencies to increase our current yield. In the other half of the portfolio it's generally been all in Treasuries and we're making a duration decision about where we want to be on the yield curve. The core side is really not making any duration bets so in our corporate portfolio we're generally buying four-year or maybe five-year paper. We never buy anything longer than five years because we've got enough issues to deal with in credit and you don't want to have to deal with interest rate risk when you're dealing with corporates. We've actually got a fair amount of money in cash right now because we're fairly defensive. We've been reducing Treasury exposure over the last year because we think the Treasury market has pretty much had its run. We've gone from 30% in Treasuries a year ago to 22% today.
What's your view of the corporate bond market right now?
In the last year we've gone from 21% up to 26% but I think right now the only attractive area we've been able to find is the single-A to triple-B area. Spreads have really tightened up more than enough on the double-A and triple-A part of the scale. Even some of the opportunities that we saw in [more volatile triple-B] credits like AOL Time Warner, AT&T, Sprint--those names have tightened down dramatically. So, the easy money we were able to find last year and the first quarter of this year seem to have been taken advantage of by the market.
Do you think you'll continue to increase your exposure to corporates?
If we can see some opportunities we may increase a bit. If we're at 26% we may go up to 28 or 29%, but it's all a bottom up decision process. We want to be somewhere between 25 and 30% and it's just a question of finding opportunities. Sometimes you get opportunities because Avnet's on creditwatch and we're betting that the company won't be downgraded.
Have you made any changes to the way you approach credit research as a result of the blowups we saw last year, such as limiting your allocation size?
Our maximum allocation [to any one name] is about 3%, but that hasn't changed. Everybody's raised credit research a notch or two. We've been out to the companies more in addition to talking with them on the phone. I'm sure everybody's doing that as well, but especially now that we've gotten to the other side of that "credit valley" as I like to call the accounting scandals of last year. We've always been comfortable with the risk discipline that we have. That 3% limit has always been a good strategy for us. We actually think there's a lot more visibility now than there was a year ago with a lot of the companies that we deal with.
Why do you think there is better visibility?
A combination of [The Sarbanes-Oxley Act] contributing to everybody wanting to make sure they've got cleaner financials and the analyst community asking for more information. You can see in [General Electric]'s 10-Qs, for example, which are a lot better than they used to be.
Can you give an example?
They give a lot greater visibility into different subsidiaries in the case of GE. There's definitely more depth as far as the breakdown of power systems and plastics and the different divisions of the company than they used to have. I haven't spent the time that our analyst has. Analysts I speak to say there's still more to be done. But, pension calculations have been raised to the forefront. Things such as deferred revenues are certainly getting scrutinized a lot harder.
Do you pay a lot of attention to sell-side research?
All our ideas are internal. We do have access to Wall Street research, but generally speaking they're not going to be aggressive buyers of the things we want to buy at the right time. We're very contrarian bond managers and so when we want to buy a Computer Associates or an AT&T certainly the equity analysts will not like the stock at all and the debt analysts--we don't really look at their stuff.
Are there any salespeople you like on the fixed-income side?
There are three different firms that cover us on the fixed-income side. If you get five guys competing for the same Avnet bond it's self-defeating. So, we'll use one or two guys and preferably if you're trying to buy the same block of bonds you probably just have one guy. You don't want to have two guys stepping over each other trying to buy the same block of bonds. In the case of Treasuries it's different: the market is more efficient. With corporates you have to be more careful. In the case of Avnet there's $250 million outstanding and even if all we want to buy is $3-5 million you can move the bond around. They see you coming and if you do that same trade with five guys it's going to be a disaster.
Any names of salespeople you want to mention?
I'll mention one. A fellow named Will Clarke. He's in Richmond with Stone & Youngberg. He'd been at BB&T [Capital Markets] for years and then he left and opened the Richmond office of Stone & Youngberg.
Are there any recent trends you've noticed in the corporate bond market?
I think in the last 10 years technology has become a huge asset. The new TRACE [Trade Reporting and Comparison Entry; BW, 3/30] system for smaller corporate transactions has been a big help. It will increase the price transparency of corporate bonds which for small firms like us will be a great asset, especially since we buy a lot of odd lot transactions in $500,000 or $1 million blocks.
Do you feel you're getting ripped off on transactions you're doing now?
If you're dealing in names such as Avnet it's not like trading Treasuries or [GE]. Credits tend to have wider spreads and big players can move the market, so any vehicle such as TRACE that'll give you visibility into where the actual transactions are going on will be a considerable help. I don't feel like we're getting ripped off because we know too much about the market, but we may be able to save even a little more money in the execution of the trade by having a bit more visibility. For smaller firms the ability to get that on a Bloomberg on a second-by-second basis is clearly an advancement from where we were five years ago.